Albert Einstein once said compound interest is the eighth wonder of the world. He was referring to how money can grow exponentially when left to sit in an investment, such as stocks, over a long period.
If you're new to investing, buying stocks may seem daunting. However, taking a few minutes to understand investing will reward you for the rest of your life. This step-by-step guide will outline the whole process, from opening an investment account to building a portfolio and rebalancing.
What are stocks?
The most important thing to understand when buying stocks is that you are buying a piece of a company. When you purchase shares of stock, you become a part-owner of the corporation. As a result, you can vote on future decisions about the company. You are entitled to a portion of the corporation's earnings as an owner. The company will either use the profits to pay you dividends or reinvest in the company - hopefully increasing the stock price.
There are two categories of investment accounts in Canada; non-registered and registered. You can think of the account as to where you buy and hold the stocks.
There are no tax benefits with a non-registered account. However, there are fewer rules to understand. Non-registered accounts should only be used if you have maximized your registered account contributions. Understanding registered accounts will significantly benefit you, especially as compounding takes effect over an extended timeframe.
The most popular types of registered accounts are Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and now the First-Home Savings Account (FHSA). This section will help you compare the types of accounts to find the best one for your situation.
TFSA | RRSP | FHSA | |
---|---|---|---|
Tax-Free Contributions | ❌ | ✅ | ✅ |
Tax-Free Withdrawals | ✅ | ❌ | ✅ |
Withdrawal Criteria | N/A | Retirement | Home Purchase |
Annual Contribution Limit |
| Lower of:
|
|
Non-Registered Account
A non-registered investment account has the most flexibility. There are no deposit limitations or withdrawal penalties. Additionally, you can access margin loans to buy more stocks. While registered accounts do not enable this, you can simulate margin through a line of credit or leveraged Exchange Traded Funds (ETFs).
However, the account doesn't act as a tax shelter. There are no tax benefits on contributions or withdrawals. You must also pay capital gains tax whenever you sell a stock or rebalance. This is contrary to registered accounts, which offer tax-free growth.
Tax-Free Savings Account (TFSA)
You can think of the Tax-Free Savings Account as paying income taxes on deposits but not withdrawals. The TFSA shines on withdrawals. While your contributions receive no tax deductions, you can withdraw without paying any tax.
Many younger investors prefer the TFSA because they pay taxes in a lower income bracket. As their career progresses, and so does their income bracket, they will not need to pay the higher income tax rate on withdrawals. Additionally, there will be no taxes on transactions within your account. This means you can rebalance or take profits without worrying about triggering capital gains tax.
Registered Retirement Savings Account (RRSP)
The Registered Retirement Savings Plan is a tax-deferred account; you receive a tax deduction on deposits but must pay taxes on withdrawals. Similarly, there is tax-free compounding due to no taxes on transactions within your account. You can think of the RRSP as receiving a tax break on deposits but paying taxes on withdrawals.
Many investors in their peak earning years prioritize RRSP contributions because it lowers their income taxes. For example, someone earning $100,000 and contributing $10,000 to their RRSP would only be taxed on $90,000 of income.
Additionally, they can withdraw when they are retired and in a lower tax bracket. While you can make early withdrawals from your RRSP, you must pay income and withholding taxes. You will also not get this contribution room back.
Upon retirement, the RRSP is usually turned into a Registered Retirement Income Fund (RRIF). At this point, you can no longer make contributions and must withdraw a minimum amount each year. Additionally, you must pay taxes on withdrawals.
First Home Savings Account (FHSA)
The First Home Savings Account (FHSA) combines the best of an RRSP and TFSA. You receive an income tax deduction on deposits and pay no taxes on withdrawals. The balance must be used to fund a home down payment within 15 years of opening the account. If you don't purchase a home within this timeframe, the account will be transferred to your RRSP without overcontributing
With a clear idea of the type of investment account you want to open, the next step is to choose a stock brokerage. A stock brokerage serves as the platform that enables you to buy and sell stocks. Nowadays, most brokerages operate online, offering convenient and cost-effective trading options.
To help you get started, we’ve compiled a list of Canada’s most popular stock brokerages. For more detailed guidance, check out our dedicated page comparing online trading platforms in Canada and one tailored specifically for options trading.
Account Minimum | Account Fees | Trading Costs | |
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Interactive Brokers | N/A | N/A |
|
moomoo | N/A | N/A |
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CIBC Investor’s Edge | N/A | $0 with a minimum account balance of $10,000 $25/quarter |
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Questrade | $1,000 | N/A |
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Qtrade | $1,000 | $25/quarter can be waived with two commissioned trades or a balance over $25,000 |
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TD Direct Investing | N/A | $25/quarter waived with a minimum balance of $15,000 |
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BMO Investorline | N/A | $25/quarter waived with a minimum balance of $15,000 |
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Scotia iTrade | N/A | $25/quarter waived either with a commissioned trade over the quarter or a balance over $10,000 |
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Wealthsimple Trade | N/A | N/A |
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National Bank Direct Brokerage | N/A | $100/annually |
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Interactive Brokers is the go-to for high-frequency traders. They are an international brokerage platform that offers an advanced trading platform and some of the lowest commissions in the industry. In addition, they also have some of the lowest margin interest rates and programs like their Stock Yield Enhancement Program that shares with you the fees that other investors pay when they borrow your stocks.
Unlike other brokerages in Canada, they offer you an all-in-one platform to access a range of investments from stocks to futures to forex markets worldwide. However, their interface can be challenging for beginner investors.
moomoo is a global investment and trading platform that expanded into the Canadian market in 2023. It offers Canadian investors access to both U.S. and Canadian stocks and ETFs through its user-friendly online platform. Moomoo is known for its competitive pricing and low minimum trading fees, which makes it an attractive option for both novice and experienced investors.
Beyond cost advantages, moomoo provides a suite of advanced trading tools and resources. Users can access free Level 2 market data, which offers detailed insights into market depth—a feature that typically incurs additional costs with other brokerages. The platform also includes comprehensive charting tools, real-time data updates, and a vibrant investor community for sharing insights and strategies. These features aim to empower Canadian investors with the information and tools necessary to make informed investment decisions.
CIBC Investor's Edge is the self-directed online brokerage platform offered by the Canadian Imperial Bank of Commerce (CIBC). It provides investors with the tools and resources to manage their own investment portfolios, offering access to a wide range of investment products, including stocks, exchange-traded funds (ETFs), options, mutual funds, guaranteed investment certificates (GICs), and fixed-income securities. The platform is designed to cater to both novice and experienced investors, featuring a user-friendly interface and comprehensive research tools to support informed decision-making.
One of the key advantages of CIBC Investor's Edge is its competitive pricing structure. The platform offers low commission rates (compared to other big bank platforms), with standard online equity trades priced at $6.95 per trade and even lower rates for active traders, students, and young investors. Additionally, CIBC Investor's Edge provides a suite of educational resources, including tutorials, webinars, and market research reports, to help investors enhance their knowledge and investment strategies. The integration with CIBC's banking services allows for seamless fund transfers and account management, providing a cohesive experience for clients who bank with CIBC.
Questrade, established in 1999, is a Canadian online brokerage firm headquartered in Toronto, Ontario. It offers various financial services, including self-directed investing and managed portfolios through its Questwealth Portfolios. Questrade provides investors with access to various investment products such as stocks, exchange-traded funds (ETFs), options, mutual funds, and more. The platform is designed to cater to both novice and experienced investors, featuring user-friendly interfaces and comprehensive research tools to support informed decision-making.
The platform offers reasonable commission rates, with stock trades ranging from $4.95 to $9.95 per transaction and free ETF purchases. Additionally, Questrade provides a suite of educational resources, including tutorials, webinars, and market research reports, to help investors enhance their knowledge and investment strategies. The integration with Questrade's banking services allows for seamless fund transfers and account management, providing a cohesive experience for clients.
Qtrade is a discount broker similar to Questrade. It offers several investment tools, including free real-time quotes, charts, research reports, and technical analysis. Stock trade commissions are fixed at $8.75, and no ECN fees are charged, which can be helpful for investors in lower-priced stocks.
In addition, they waive commissions for a list of 100 ETFs, making investing in smaller amounts or active trading more attractive on Qtrade's platform. They offer a free Investor Plus program for investors with over $500,000 in assets or who make over 150 trades per quarter that offer discounted commissions and dedicated phone support.
TD Direct Investing, a division of TD Bank Group, offers self-directed investors a comprehensive suite of tools and resources to manage their investment portfolios. Clients can access a wide range of investment products, including stocks, exchange-traded funds (ETFs), options, mutual funds, and fixed-income securities. The platform caters to both novice and experienced investors, providing user-friendly interfaces and advanced trading capabilities.
One of the key features of TD Direct Investing is its variety of trading platforms designed to meet diverse investor needs. WebBroker, the most popular platform, offers real-time market data, personalized homepages, and extensive research tools. For active traders, the Advanced Dashboard provides pro-grade tools, including real-time streaming data, customizable charting, and analytics. Additionally, TD Direct Investing offers educational resources and market insights to help investors make informed decisions.
BMO InvestorLine is BMO's in-house direct investment platform. They offer a primary platform for casual investors with real-time quotes and a professional platform for active traders. Like TD Direct Investing, they do not provide free ETF trades and charge a flat commission on all stock and ETF trades. You can still buy and sell mutual funds for free but may have to pay additional fees depending on the situation.
If you have a significant amount to invest, you may qualify for their 5-Star Program that gives you free access to more detailed quotes, discounts on commissions, and exclusive support, research, and IPO access. If you already have an account at BMO, this could be a good option for you.
Scotia iTrade is Scotiabank's investment platform. Like TD Direct Investing and BMO InvestorLine, they offer a fully integrated service with advanced tools and research resources. They charge a fixed fee for stock and ETF trades.
If you're already a Scotiabank customer, Scotia iTrade lets you see and manage your investment and savings account from your Scotiabank dashboard and quickly transfer funds between accounts online.
In addition, if you have over $250,000 or $1,000,000 invested, you can access their Gold and Platinum iClub, which gives you priority service, discounted commissions, and access to their more advanced trading platform.
Wealthsimple Trade is a commission-free stock trading platform in Canada. It allows users to buy and sell stocks, exchange-traded funds (ETFs), and cryptocurrencies. Key features include no minimum investment requirements, fractional share purchasing, and automatic dividend reinvestment. The platform's user-friendly interface and educational resources make it accessible to both novice and experienced investors.
WealthSimple Trade also offers additional features like margin trading and options trading for more advanced investors. However, it's important to note that these features carry additional risks and should be used cautiously. Overall, WealthSimple Trade provides a convenient and cost-effective way for Canadians to invest in various asset classes.
National Bank Direct Brokerage is the online brokerage arm of the National Bank of Canada. National Bank is one of Canada's big six lenders, and the only one to offer commission-free trading.
National Bank Direct Brokerage offers a range of investment products including stocks, ETFs, mutual funds, GICs, and bonds. They also have an advanced trading platform called Market-Q that is only available to clients who make more than 10 trades per month with a balance over $1,000. As you make more trades, you qualify for free pricing on their premium platforms.
There is no best investment style for everyone. Some investors prefer to actively trade on a computer, while others want to spend little time managing their funds. Your investment style may also affect the brokerage and the type of account you select.
For example, a technical trader may prefer a non-registered account with Interactive Brokers. This will give them access to margin and a platform designed for their trading style. Consequently, a passive investor saving for retirement may prefer a robo-advisor and an RRSP.
You can even combine investment styles by allocating a percentage of your portfolio to different strategies. For example, you may decide to invest 80% in passive ETFs and try out different approaches with the remaining 20%. While it comes down to your preferences, this section will explain the most popular investment styles.
Value Investing
Value investing is an investment style that involves buying stocks that are undervalued by the market and holding them for the long term. Value investors believe that the market overreacts to news and events in the short term, resulting in prices that do not reflect a company's actual value.
Value investors will look at various factors to find these companies, including price-to-earnings ratios, price-to-book ratios, and dividend yields. They will also look at a company's management team, earnings history, and balance sheet. Some well-known value investors include Warren Buffett, Benjamin Graham, and Seth Klarman.
Passive Investing
Passive investing is an investment style that involves buying and holding a basket of investments, such as an index fund, for the long term. Passive investors believe it is impossible to beat the market long-term. As a result, they try to match the market's return by investing in a low-cost index fund.
Index funds track a specific market index, such as the S&P 500. They are designed to give investors the same return as the index they track. Some well-known passive investors include Jack Bogle and Burton Malkiel.
Active Investing
Active investing is an investment style that involves taking a more hands-on approach to investing. Active investors attempt to beat the market by picking individual stocks, timing their purchases, and actively managing their portfolios.
To be a successful active investor, you need to have a good understanding of the markets and the ability to do your research. You also need to be comfortable with taking on more risk. Some well-known active investors include Peter Lynch and Joel Greenblatt.
Momentum Investing
Momentum investing is an investment style that involves buying stocks that are experiencing an upward trend and selling them when the direction starts to reverse. Momentum investors believe that prices tend to move in predictable cycles and that it is possible to profit from them.
To find momentum stocks, investors will look at factors such as price momentum, earnings momentum, and relative strength. They will also look at technical indicators, such as moving averages and the relative strength index. Some well-known momentum investors include William O'Neil and Ken Fisher.
Growth Investing
Growth investing is an investment style that involves buying stocks that are expected to experience above-average growth. Growth investors are willing to pay a premium for these stocks in the hope that they will generate outsized returns.
Investors will look at revenue growth, earnings growth, and analyst ratings to find growth stocks. They will also look at a company's competitive advantages and business model. Some well-known growth investors include Phil Fisher and Peter Lynch.
Growth at a Reasonable Price (GARP) Stocks
Growth at a reasonable price (GARP) stocks offer both strong growth prospects and attractive valuations. GARP stocks are often undervalued by the market and have the potential to generate outsized returns.
Investors will look for companies with solid growth prospects trading at reasonable valuations to find GARP stocks. They will also look for companies with sound fundamentals and a history of consistent earnings growth. Some well-known investors who focus on GARP stocks include Warren Buffett and Peter Lynch.
Technical Analysis
Technical analysis is a type of stock analysis that looks at past price patterns to predict future movements. Technical analysts believe that prices move in cycles and that these cycles can be identified and used to make investment decisions.
Technical investors will use charts and indicators to identify trends and trading opportunities. Technical indicators are mathematical formulas that are used to identify trends. Some well-known technical analysts include Martin Pring and John Murphy.
Your investment style will influence the types of assets you invest in. For example, passive investors prefer low-fee ETFs, while technical traders may prefer bonds or individual stocks. You even can “hire” an active investor by buying a Mutual Fund or actively managed ETF.
Be sure to compare the management fees of your investments. For example, a 2% annual fee can significantly affect your long-term returns - especially if the fund manager can't outperform a passive index. A fee below 0.2% is ideal, whereas you should be cautious with expenses above 1%.
Most funds have a management fee and a management expense ratio (MER). The MER shows the total annual fee you pay while holding the fund, while the management fee just shows the portion going to the fund manager. As a result, the MER will always be higher and is the more important number.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a basket of securities that tracks an index. For example, Vanguard's S&P 500 Index ($VFV) mirrors the S&P 500 index return. By purchasing this ETF, you're investing in Apple, Microsoft, Amazon, Tesla, Google, and more.
ETFs are traded on stock exchanges and can be bought and sold like stocks. ETFs are a popular choice for passive investors because they offer broad exposure to an entire market or sector at a low cost. For example, you can purchase a REIT to invest in the real estate market.
The most popular ETF companies in Canada are Blackrock, Vanguard, and Fidelity.
Mutual Funds
A mutual fund is a type of investment that pools money from many investors and invests it in a portfolio of assets. Mutual funds are managed by professional money managers who attempt to generate returns for investors.
Mutual funds are a popular choice for active investors because they offer access to professionally managed portfolios. However, mutual funds come with higher fees than ETFs. In addition, some mutual funds charge a load fee which is an additional expense when you buy or sell the fund's shares.
Individual Stocks
An individual stock is a type of investment representing ownership in a single company. Individual stocks can be bought and sold on stock exchanges.
Individual stocks are a popular choice for active investors because they offer the potential for high returns. However, individual stocks are also riskier than ETFs and mutual funds.
Bonds
A bond is a type of debt security that pays periodic interest payments. Governments and corporations typically issue bonds to raise capital.
Bonds are popular for investors who want to earn income from their investments. However, bonds are subject to interest rate risk, meaning they can lose value if interest rates rise. Bonds with further maturity dates are more impacted by interest rate changes.
Now that you know the different investment styles, it's time to start building your investment portfolio. When constructing a portfolio, there are a few things you need to consider:
Investment Goals
Risk Tolerance
Time Horizon
Investment Budget
Once you understand your investment goals, risk tolerance, and time horizon, you can start to build your portfolio. A good starting point is to allocate a percentage of your portfolio to your preferred investment styles and asset types. Over time, your investments will deviate from their percentage goal.
At least once per year, rebalance your portfolio by taking profits from your investments that increased and use that money to buy more of the underperformers. You can also use new contributions to buy more of the diminished stocks. Your goal should be to bring your investments back to their desired weighting.
Diversify your portfolio:
Invest in various stocks, sectors, and industries. This will minimize exposure to any particular stock or sector.Invest in blue chip stocks:
These are large, well-established companies with a history of consistent earnings growth. They tend to be less volatile than smaller, more speculative companies and offer investors a measure of safety.Invest for the long term:
The longer you hold your investments, the more time they have to recover from any short-term setbacks.Dollar cost average:
Invest a fixed amount of money at regular intervals, regardless of the price.At this point, you've opened an investment account at a brokerage, selected an investment style and developed a portfolio. The next step is to begin buying stocks and investing in your portfolio. After logging into your brokerage account, you can easily buy stocks using four easy steps.
However, there are various bank holidays throughout the year. If you place an order on the weekend, the order will execute on the following business day at the market open.
You can choose from market or limit orders when you buy a stock. With a market order, you specify the number of shares you want to purchase and the order is executed at the current best market price. For example, if XYZ stock is trading at $10 per share and you place a market order for 100 shares, your total cost will be $1,000.
With a limit order, you specify the number of shares you want to buy and the maximum price you're willing to pay. Your order will not be completed if the stock price never falls to your limit.
For example, if XYZ stock is trading at $10 per share and you place a limit order for 100 shares with a limit price of $9.50, your order will only be executed if the stock price falls to $9.50 or below.
Limit orders give you more control over the price you pay for a stock, but there is no guarantee that your order will be executed. Market orders are more likely to complete quickly, but you may pay more than you want.
If you want to buy US stocks from Canada, you must open a brokerage account with a Canadian broker that offers US trading. Not all Canadian brokers provide this service, so check first.
Once you have opened an account, you can buy US stocks in the same way you would buy Canadian stocks. The main difference is that you must convert your Canadian dollars into US dollars before placing your trade. There may be a conversion fee with your broker.
How To Buy Tesla Stock
Tesla is a company that designs, manufactures, and sells electric cars and solar roofs. Founded in 2003, Tesla has since grown to become one of the most well-known and valuable car companies in the world.
Tesla's first car was the Roadster, an all-electric sports car that could go from 0 to 60 mph in 3.7 seconds and had a range of 245 miles on a single charge. The company has since released several other models, including the Model S, Model X, and Model 3.
By searching Tesla’s ticker symbol in your brokerage, you can easily buy Tesla’s stock from the NASDAQ exchange.
How To Buy Apple Stock
Apple designs, manufactures and sells consumer electronics, computer software, and online services. Founded in 1976, Apple is the world's second largest public company.
Apple's products include the iPhone, iPad, MacBook, and Apple Watch. The company also owns the App Store, iTunes Store, and Apple Music.
By searching Apple’s ticker symbol in your brokerage, you can easily buy Apple’s stock from the NASDAQ exchange.
How To Buy Amazon Stock
Amazon is a company that designs and sells consumer electronics, computer software, books, and online services. Founded in 1994, Amazon is the world's largest online retailer.
Amazon's products include the Kindle, Fire TV Stick, and Echo Dot. The company also owns Amazon Prime, which offers members free two-day shipping on millions of products.
Amazon's stock ticker is $AMZN. You can easily buy Amazon's stock using any major brokerage.
Once you've started investing, monitoring your progress and ensuring your portfolio is on track to meet your investment goals is essential. Review your portfolio at least once a year or whenever you approach significant changes in your life. For example, if you want to use investments to buy a house soon, you may want to lower your risk. To review your portfolio:
Step One
Start by looking at your asset allocation. Make sure you're still allocated in line with your risk tolerance and investment goals. If not, make changes to get back on track.
Step Two
Next, look at the performance of each investment. Are any underperforming? Are any gone ex-dividend (meaning the purchaser won't receive the next dividend payment)? Should you sell them and invest the money elsewhere?
Step Three
Finally, review your investment costs. Are you paying too much in fees? Are there cheaper alternatives available?
Step Four
Over time, your asset allocation will become unbalanced as some investments outperform others. You will need to rebalance your portfolio to keep your asset allocation aligned with your original targets. This involves selling some of your winners and buying more of your losers.
For example, if you start with a 50/50 split between stocks and bonds and the stock market goes up while your bonds decrease, your portfolio will be out of balance. You would need to sell some of your stocks and use the money to buy more bonds.
Rebalancing is essential because it helps you stay diversified and reduces your risk. It also forces you to buy low and sell high, a fundamental principle of successful investing.
Investing in stocks in Canada carries specific tax implications that vary based on the type of account you use and the nature of your investment income. Here's an overview to help you understand these considerations:
Once you have an investment plan, it's essential to stick to it. The stock market can be volatile; making impulsive decisions when prices rise or fall is easy. However, if you stick to your plan and invest for the long term, you will be well on your way to achieving your investment goals.
Disclaimer: