How to Buy Stocks in Canada

How to Buy Stocks in Canada: Easy Step-by-Step Guide

Are you wondering how to get started on your investing journey?

Investing is one of the most exciting things you can do for your financial health, and I have good news for you – buying stocks in Canada has never been easier.

In this article, you will learn everything there is to know about getting started investing in stocks and how to buy stocks in Canada.

How Do I Buy Stocks Directly in Canada?

These days, investors no longer have to go to a physical bank branch, deal with exorbitant trading fees, or navigate through cluttered trading interfaces.

The process to buy stocks in Canada is as simple as creating and funding a self-directed online brokerage account.

Jumpstart Your Investing Journey

If you want to get started right away, sign up and create a self-directed online brokerage account.

Low-fee options such as Questrade and Qtrade Direct Investing mean that there’s never been a lower barrier to entry – or a better time – to get started.

Here are easy step-by-step instructions to help guide you through how to buy stocks in Canada:

  1. Sign up for an online brokerage account. You can open a self-directed TFSA, RRSP, FHSA, or non-registered account.
  2. Fund your investing account by linking it to your chequing or savings account. You can then set up automated deposits to keep funding your investment account periodically.
  3. Choose an investing strategy that best matches your risk tolerance and individual goals.
  4. Buy stocks or exchange-traded funds (ETFs) during trading hours on the online brokerage trading interface.

How to Buy Stocks in Canada

Step 1: Create An Online Brokerage Account

A brokerage is simply an entity that acts as the intermediary between you (the investor) and the stock exchange.

An online brokerage allows you to buy stocks in Canada from anywhere you have internet access, such as from the comfort of your own home.

If you’re a do-it-yourself (DIY) investors, you’ll want to sign up for a self-directed online brokerage, which is a low-cost option where you control all your investing decisions.

You can also sign up with one of the big five bank brokerages. While there is the benefit of convenience if you already use their banking services, the tradeoff is higher trading fees.

So if you’re a budget-conscious investor, avoid the big bank brokerages as higher trading costs will eat into your investment profits.

Here are some of the best online brokerages available for Canadians today:

  • Questrade – $0.01/share commission fees (minimum $4.95, maximum $9.95), free ETF purchases, $50 in free trades
  • Qtrade Direct Investing – One of the best around at providing customer service, $8.75 per trade, up to $2,000 cash back
  • Wealthsimple – Commission-free trades, clean trading interface, simplistic bare-bones investing experience

PLAN - PRICE

Description

QUESTRADE

$0.01/share (min $4.95, max $9.95)

Free ETF purchases

$50 in free trades

QTRADE DIRECT INVESTING

$8.75 per trade
User-friendly platform
Up to $2,000 cashback + $50 bonus

WEALTHSIMPLE

Commission-free stock and ETF trades
Simple user interface
Ability to purchase fractional shares

Selecting Your Investment Account Type

During the account creation process, you’ll be asked which type of account you’d like to open.

The most common types of investing accounts you can create are a TFSA, RRSP, FHSA, or non-registered account.

To decide what type of self-directed account to open, consider the following rules of thumb:

  • First Home Savings Account (FHSA) – If you have not bought your first home and are looking to save up for one through investing, consider opening a FHSA account.
  • Tax-Free Savings Account (TFSA) – If you have unused TFSA contribution room and want the flexibility to withdraw funds, consider opening a TFSA account.
  • Registered Retirement Savings Plan (RRSP) – If you are in a higher income tax bracket or saving up for retirement, consider opening a RRSP account.
  • Non-Registered Account – For all other general investing purposes (or if you have maxed out your registered accounts), open an unregistered account. As this is not a tax-sheltered account, you will need to pay tax on capital gains and dividend income.

Other, less common account types that may make sense to open in certain circumstances include:

  • Registered Education Savings Plan (RESP) – A type of account that lets you save for your child’s future post-secondary education.
  • Locked-in Retirement Account (LIRA) – A type of pension account funded by a transfer from an employer-sponsored pension plan.
  • Registered Retirement Income Fund (RRIF) – A retirement account that pays out regular income, often rolled over from RRSPs to fund retirement.

Step 2: Fund Your Investing Account

Once you’ve opened an online brokerage account, it’s time to put some money into it.

You can initiate the link between your investment account and your bank account either on the brokerage side or your bank’s side.

  • From the bank’s side – Your investment account will have a unique account number that you can reference to transfer your funds to.
  • From the brokerage’s side – You can link to your chequing account using the info found on a void cheque (i.e. branch, transit number, and account number)

Once this is set up, you can easily move money into and out of your online brokerage account.

You can also set up pre-authorized deposits, which are automatic recurring deposits from your bank account to your investment account.

This is a great way to budget for savings and investments as it automates contributions to your investment account, allowing you to buy stocks on a regular basis. This technique is a form of dollar-cost averaging and is a powerful investing strategy to grow long-term wealth.

Step 3: Choose Your Investing Strategy

Once you have funded your investment account, you’re almost ready to buy stocks in Canada.

Before you eagerly bust out your stock-picking skills to buy the hottest stocks, you should first do some due diligence to determine what investing strategy best suits you as an individual.

It’s important to go into investing with a plan in mind so that you buy based on logic instead of emotion.

Consider your answer to the following questions:

  • What is my goal with this investment portfolio? Are you saving for the short-term or long-term? The ideal investment strategy for someone saving for a down payment in 3 years is not the same as someone saving for long-term retirement.
  • What is my risk tolerance? Consider factors like age, whether you would be tempted to deviate from your strategy if the market dipped, and whether you need to withdraw funds in the near future.
  • How much time do I have to spend investing? Do I want to trade actively or follow a passive, diversified approach by investing into the overall market?

Here is an overview of some of the most popular investing strategies.

Stock Investing Strategies

Index Investing

The goal of the index investor is to build a diversified investment portfolio by buying exchange-traded funds (ETFs) that passively track market indexes at a low management fee.

Also known as “couch potato” investing due to its passive nature, this strategy has been gaining in popularity year after year, and is arguably the ideal investment strategy when buying stocks in Canada.

This strategy is simple to implement, doesn’t require active management, and provides great risk-adjusted returns. There are several ways to do it, but my favourite has to be “one-fund solutions”, or all-in-one ETFs.

As the name suggests, with an all-in-one ETF, you can purchase a single ETF and have a balanced investment portfolio. There are a few different options depending on the allocation of stocks and bonds you prefer.

This is a passive approach to investing that requires minimal time investment and doesn’t involve individual stock picking or the need to constantly monitor the market.

You can just set it and forget it.

That’s why index investing is a great option for investors who want to live their lives while also taking advantage of long-term compounding market returns.

Dividend Investing

The dividend investor focuses on selecting stocks with a lengthy, historical track record of maintaining or increasing their dividend payouts over time.

A dividend is a regular payment that the company makes to its shareholders, and represents a shareholder’s own slice of a company’s profits.

The biggest appeal for dividend investors is the steady, consistent nature of income being generated through stock dividends.

This makes cash flow management easier because instead of the need to sell stocks to withdraw funds, dividend investors can simply hold the underlying stock and withdraw cash from the dividend payments.

Investors can also choose to reinvest the dividends through a Dividend Reinvesting Plan (DRIP), where dividends are used to automatically purchase more shares of the stock.

Dividend investing can also bring some of the best tax benefits in Canada.

For example, if you’re retired and your only taxable income comes from eligible dividends, the Federal Dividend Tax Credit can reduce your income taxes to nearly $0 for up to the first approximately $60,000 in dividend income.

Growth Investing

The focus of the growth investor is to invest in small, emerging companies that are poised to grow at an above-average pace.

These investors select companies that they believe have not yet reached their full potential, but show lots of promise for success.

These companies generally reinvest their profits into the business instead of paying dividends. This is to accelerate their rate of growth and potential for capital appreciation (stock price increases).

The hope is that these growth stocks will show impressive returns as they develop and become successful. On the flip side, a promise of growth does not equate to actual growth, and the business could just as easily fall flat.

Value Investing

The value investor aims to buy stocks that are undervalued based on an analysis of their fundamentals and intrinsic book value.

Warren Buffet is perhaps the most well-known investor that uses the value investing strategy.

The premise of value investing is to buy stocks that dip below their “true” value.

For example, a stock could see a temporary drop in price due to recent negative news. The value investor will see this as a bargain on the “true” value of the stock, and will buy if the fundamental analysis of the company is still solid.

Think of value investing like buying something while it’s on sale.

Pick Your Investment Strategy

In general, any investment strategy which requires specific stock picking will require a lot of due diligence.

Unless you’re willing to spend the time and energy to do your research, I recommend going with the index investing approach.

It’s a simple and effective strategy that offers the benefits of diversification and favourable risk-adjusted expected returns.

That’s not to say you can’t try your hand at stock picking. Who doesn’t want to buy in on the next Apple?

However, as a non-professional, you should treat these picks as gambles. Make sure you’re ready to stomach the volatility, and that you never invest more than you’re willing to lose.

If you’re interested in more advanced investment techniques, you can learn more about strategies that can potentially beat market returns.

Step 4: Buy Stocks On The Online Brokerage Trading Interface

Now that you’ve decided on a strategy that best suits your financial situation and risk tolerance, it’s time for the final step of how to buy stocks in Canada, which is to actually buy the stocks in your investment account.

The stock market is open from 9:30 am to 4:00 pm EST on weekdays, except during holidays. You can make trades on the online brokerage during these hours.

The actual process of buying the stocks is as simple as finding the stock ticker symbol, picking a quantity and price to buy at, and waiting until your order is executed on the stock exchange.

For example, if you’re using Questrade, here’s a rundown of how to buy stocks on their Questrade Edge brokerage platform.

How to Buy Stocks on Questrade

When buying stocks, you might come across a few that need to be purchased in US dollars, which are known as US-listed stocks. You can either let Questrade convert your CAD for you (a 2% fee), or use a tactic called Norbert’s Gambit to reduce your foreign exchange fees down to less than 0.2%.

And that’s it – buying stocks in Canada is really as simple as that.

However, there’s more to investing in stocks than the mere logistics of buying stocks and figuring out a stock’s ticker symbol.

To go from a beginner investor to a savvy one, you’ll want to learn about the “why” of investing – that is, the core concepts and fundamental principles of investing.

Why Invest And Buy Stocks In Canada?

All this talk about investing might sound promising, but you might be wondering why investing is so highly regarded by many.

Why exactly is it so beneficial to buy stocks in Canada?

Is it really worth the risk when I can keep my money secure in a bank savings account or GIC?

1. The Power of Compounding Returns

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”  –  Albert Einstein

The magic of compounding returns is perhaps the most compelling reason to invest in stocks.

Simply put, compounding returns cause exponential portfolio growth.

It is the mechanism that snowballs your investments to the point where your gains are making you more gains, and those gains and making you even more gains, and so forth.

Left undisturbed for long enough, an investment portfolio that benefits from decades of compounding returns will be one where capital gains and dividends make up most of the portfolio value, rather than the initial contributions.

At the core of long-term investing is an investor’s ability to leverage exponential returns.

That’s why long-term investing is so powerful!

2. A Passive Way To Earn Income

As mentioned earlier, investing in stocks can be as easy as buying a single globally diversified all-in-one ETF.

Such strategies require very little time and maintenance once you’ve set up your brokerage accounts and automated contributions with pre-authorized deposits.

While nothing is entirely passive, index investing is about as passive as it gets.

By buying and holding stocks, you’re making your money work for you instead of the other way around.

3. Favourable Tax Treatment

Who doesn’t love paying less in taxes?

One of the best features of investing is that profits from investing can be entirely tax-free if the investments are within a registered account such as a TFSA, RRSP, or FHSA.

For example, if your investments are held in a TFSA, any investment profits and withdrawals are tax-free. RRSP investment gains are tax-free, but since you contribute with before-tax dollars, withdrawals are still taxed at your marginal tax rate.

Even in a non-registered account, income generated from dividends and capital gains are treated favourably to regular employment income.

Only half of your capital gains are eligible to be taxed at your marginal tax rate. Dividends are also taxed advantageously, which holds especially true the less income you have.

Taxes Paid Income Type Comparison

4. Investing Forces You To Save

In order to invest, you need to have money saved up in the first place.

According to Statistics Canada, the average net saving for all Canadian households in 2018 was $852, and the BDO Canada Affordability Index found that a third of Canadians don’t save anything at all!

By setting aside some money to invest, you are consciously budgeting money to save instead of spend.

An effective way to automate savings is to set up pre-authorized deposits after every paycheque to automatically contribute funds into your online brokerage account.

By paying yourself first, you establish effective habits that will grow long-term wealth and a comfortable retirement nest egg.

5. A Hedge Against Inflation

By investing your savings, the real value of your money is being protected from inflation.

There is a real (pun intended!) problem with storing all of your savings in the bank for long periods of time.

This money is earning a savings interest rate that is likely lower than the average inflation rate of 2% in Canada. Unfortunately, that means that the buying power of your money is actually decreasing over time in a bank account.

That’s not to say that it’s a bad idea to have some savings. For example, it’s commonly recommended to keep an emergency fund of at least 3-6 months of living expenses in a liquid bank account.

However, for the money you won’t be needing soon, you’re definitely missing out on long-term capital appreciation if you forego investing these additional savings into the stock market.

Is It Worth Trying To Beat The Market?

Here’s a little anecdotal story of my early investment journey.

When I was in my early 20s, I was the kind of investor that would pick my own stocks, believing that I could easily beat average market returns.

That didn’t last long, and soon I grew tired of constantly checking up with my stocks, keeping up with the latest headlines, and worrying about whether it was time to buy or sell.

I started to wonder if there was a more efficient approach to investing.

How likely is it that the average investor will be able to outperform the market over the long run? Let’s look towards the data.

In the world of investments, there is a concept called alpha. Alpha represents the ability of an investment strategy to generate returns excess of market returns.

Research done by the S&P Dow Jones Indices show that nearly 90% of actively managed mutual funds performed worse than the S&P 500 over the last 15 years. In other words, their investments generated negative alpha.

A potential explanation for this result can be found in the Efficient Market Hypothesis (EMH), which hypothesizes that all available information is already factored into stock prices, making it impossible to generate alpha consistently and beat the market over the long run.

The inability of even the market professional to beat a passive investing approach speaks to the low likelihood of the average investor outperforming the market, at least without taking on significant risk.

This is yet another reason why I believe that most investors should keep things simple with an index investing approach.

A Word of Caution Against Timing The Market

There’s a cliché that goes: “Time in the market beats timing the market.”

This saying has never been more true in recent times.

The pandemic recession and bounce back was the quickest recession recovery in history, with the S&P 500 recovering to pre-pandemic stock prices in just 6 months.

Now imagine if you had hit the panic button and took out your money when the markets slipped 30%.

Indeed, a majority of annual stock market returns are driven only by a few days of the year.

Here is a chart of the average S&P 500 returns from 1996-2011, and the corresponding returns if you had missed the best performing days of the year.

Source: SchwabCenter for Financial Research

That means that if you were trying to time the market and missed just the top 10 days, your returns would be cut almost in half!

This was even more exacerbated in a volatile year like 2020 – if you had missed holding the S&P 500 for just 5 of the best days of the year, you would have missed out on 30% of the year’s gains!

Alternatively, what would happen if you chose to buy and hold instead of trying to time the markets?

Here are the rolling average S&P 500 returns from 1926-2011.

Source: SchwabCenter for Financial Research

What does this mean?

If you had started investing in the S&P 500 in any given year in the study, you would have made at least a 3.1% average annual return after 20 years! Buy-and-hold investing delivers remarkably consistent positive annualized returns the longer your investing time horizon is.

The lesson here is that you can’t go wrong with passive buy-and-hold investing.

Of course, it’s not impossible to time the market in the short-term. However, a broken clock is right twice a day. The reality is that nobody has a crystal ball that can tell you with certainty exactly what will happen with stock prices.

A Simple Way To Buy Stocks In Canada

It’s important for an investor to make rational investing decisions that are backed by data and research.

However, the focus should really be on increasing your savings rate rather than focusing on picking the best investments.

Investing itself can be made both simple and effective with all-in-one asset allocation ETFs, and are the go-to investing strategy for an investor that wants exposure to the whole market.

By buying one single ETF, you can have a globally diversified portfolio that is automatically rebalanced based on your risk tolerance, while incurring low management expense ratios (MERs) of around 0.2%.

Other Passive Investing Options

So far, all the investing strategies we have discussed are DIY strategies that you manage yourself.

But perhaps DIY investing isn’t your cup of tea and you want to take an even more hands off approach.

Instead, you can have your investment portfolio managed for you. Two such options you have are mutual funds and robo advisors.

Mutual funds are investing portfolios that are actively managed by professional investment advisors. This is a more hands-off approach to investing since you’re essentially letting a professional do all the work. The main downside of mutual funds is that they usually come with higher management fees.

Recommended Canadian mutual fund: TD’s e-Series funds

Robo-advisors are services that use sophisticated algorithms to invest your money. They generally invest in the broad market, similar to an index investing approach. The benefit is that besides being quite hands-off, they have lower fees than mutual funds due to their automated nature. Their management fees hover around 0.5%, which are higher than ETFs but lower than mutual funds.

Recommended Canadian robo-advisor: Wealthsimple Invest

You Now Know How To Buy Stocks In Canada

There is so much more you could learn about investing, but I truly believe that for the average investor, a passive index investing approach is all you need to succeed and grow long-term wealth.

Simplicity can be both a blessing and a curse – you will probably get bored at one point or another and be tempted to play around with your portfolio.

But resist the urge – the best path forward is one that you can stick to, and one that is based on time-tested and strategies with empirical support. Remember that at the end of the day, even professionals have a difficult time beating market returns.

I hope that you’re now equipped with the essential knowledge needed on how to buy stocks in Canada.

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