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

Buying stocks in Canada has never been easier.

It’s something that every financially savvy Canadian should know how to do.

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

If you want to dip your toes into do-it-yourself (DIY) investing, online brokerages are the way to go. With low-cost options such as Questrade and Qtrade Direct Investing now available for Canadians, there’s never been a lower barrier to entry – and a better time – to get started.

No longer do you have to put up with exorbitant commission fees and cluttered trading interfaces. The process to invest and buy stocks in Canada is as simple as signing up and funding your online brokerage account.

If the idea of creating long-term wealth through investing piques your interest, here’s the step-by-step process on how to buy stocks in Canada:

1. Sign up for an online brokerage account. You can open a TFSA, RRSP, or unregistered account. The online brokerage I recommend for 95% of Canadians is Questrade.
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.

Step 1: Sign Up For 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 from anywhere you have online access, including the comfort of your own home.

As a DIY investor, my personal preference is to use a simple and low-cost option. I don’t prefer using the online brokerages of the big banks due to their higher commission fees. The only argument I see for using these is for the convenience factor, such as if you already have a banking account with them. As a budget-conscious investor, I prefer avoiding the higher trading costs that eat into my bottom line, along with the need to understand the fine print and complex trading interfaces.

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

• Questrade – $0.01/share commission fees (minimum $4.95, maximum $9.95)
• Qtrade Direct Investing – One of the best around at providing customer service, with a slightly higher cost of trading ($8.75 per trade).
• Wealthsimple Trade – Trades are commission-free, with the platform being more of a simplistic bare bones investing experience.

Choosing the Type of Investing Account

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, and unregistered account. To decide what type of account to open, consider the following rule of thumb:

• If you have TFSA contribution room, you should open a TFSA account.
• The next best option is typically to invest in an RRSP if your TFSA is maxed.
• For all other general investing purposes, or if you have maxed out your registered accounts, you can open an unregistered account. However, as this is not a tax-sheltered account, you will need to pay tax on capital gains and dividend income.

Other options include opening an RESP, LIRA, RRIF, or joint account.

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 pay funds directly towards.
• From the brokerage’s side – You can link a chequing account with the info found on a void cheque (i.e. branch, transit number, and account number)

Once this is set up, you can then easily move money into and out of your online brokerage account. Note that if you are opening a TFSA account, these movements count as contributions and withdrawals on your contribution limit.

You can also set up automatic recurring deposits into your investment account, which will allow you to buy stocks on a regular basis. This technique is known as dollar-cost averaging and is a powerful investing strategy to grow your nest egg.

Step 3: Choose Your Investing Strategy

Once you have funded your investment account, you’re almost ready to invest!

But before you hastily jump into buying the hottest stocks, you should first decide what investing strategy best suits your individual needs. It’s important to go into investing with a plan in mind, so that you buy based on logic instead of emotions.

Consider your answer to the following questions:

• What is my goal with this investment money? Are you saving for a short, medium, or long-term goal? (For example, saving for a car or down payment in 3-5 years, or saving for 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 capital in the near future.
• How much time do I have or want to spend investing? Do I want to trade actively, or follow a passive diversified approach by investing with the general market?

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

Index Investing

The goal of the index investor is to build a diversified index portfolio by buying 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 the strategy that I personally use and recommend.

I love this strategy because of how easy, yet powerful it is. There are several ways to do it, but my favourite has to be the “one-fund solutions” (a.k.a. all-in-one ETFs) that Vanguard, BlackRock, and BMO have created. They allow you to create a balanced portfolio by buying just one single ETF.

It is a passive approach 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 market returns as a whole. I recommend this approach for the majority of DIY investors.

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 capital, dividend investors can simply hold the underlying stock and withdraw cash from the dividend payments. Another alternative is to reinvest the dividends through a Dividend Reinvesting Plan (DRIP).

Dividend investing can also bring some of the best tax benefits in Canada. For example, if you retire and your only taxable income comes from eligible dividends, using dividend tax credits can reduce your federal and provincial taxes to nearly $0 for up to the first ~$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. The investor believes that these companies 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.

Any specific stock picking strategy will require a lot of research. Unless you’re willing to spend the time and energy, I recommend going with the index investing strategy. 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, I personally treat these picks as gambles, and I make sure never to invest more than I can lose. Make sure you’re ready to stomach the volatility and the risk of loss if you choose to buy individual stocks.

If you’re interested in learning more advanced investing strategies, take a look at how you 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 to actually buy the stocks in your investment account.

The stock market is open from 9:30am to 4:00pm 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 platform.

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 fee (down to less than 0.2%).

Buying stocks in Canada is really as simple as that!

However, there’s more to investing than knowing how to buy shares of a ticker symbol.

All savvy investors should have a fundamental understanding of the core investing principles that are described next. Believe me, you’ll want to make sure you’re familiar with these concepts, especially if you’re just getting started with investing.

Why Is It Important To 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 investing so beneficial? Is it worth the risk when I can keep my money secure in a bank account?

There are several great reasons to get started investing in stock:

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

Compounding returns – perhaps the most compelling reason to invest in stocks.

Compounding returns are what allow you to truly snowball your investments, to a point where your gains are making you more gains, and those gains and making you even more gains, and so forth.

The result is an exponential snowball effect that really shows its benefits down the road. This is when your capital gains and dividends make up more of your portfolio value than the initial contributions themselves.

At the core of investing is the ability to leverage exponential returns.

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

2) An almost completely passive way to earn additional income

As mentioned earlier, investing in stocks can be as easy as buying a single globally diversified ETF. Strategies such as index investing (“couch potato” investing) require very little time and maintenance once you’ve set up your brokerage accounts and automated deposits. While nothing is entirely passive, index investing is about as passive as it gets.

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

3) Capital gains and dividends are taxed much more favourably than regular income

Who doesn’t love paying less in taxes?

One of the best features of investing is that income generated from dividends and capital gains (profit made when selling stock) are treated differently from regular employment income.

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

Even better, if your investments are held in your TFSA, 100% of your investment income is tax-free. Investments held in an RRSP are tax-deferred until withdrawal.

4) Investing forces you to save money in the first place

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.

I recommend that you allocate a portion of your paycheque to automatically deposit into your online brokerage account. This is known as paying yourself first, and is an amazing habit that will set you up with a nest egg so and grow your net worth.

5) 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 Long-Term?

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 the market returns.

That didn’t last long, and soon I grew tired with checking up with my stocks every day, keeping up with the latest headlines, and constantly worrying 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 unlikelihood of the average investor outperforming the market without taking on significant risk. This is yet another reason why I recommend that most investors go with index investing.

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 as we have seen since the start of this decade.

2020 has seen 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%.

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

Source: SchwabCenter for Financial Research

From this illustration, it’s evident that a majority of the year’s returns are made from just a few days. 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 exactly what will happen to the market in the near future.

A Simple And Efficient Way To Invest

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 through a passive index investing approach.

The great news is that there are ETFs that can do just that. As mentioned earlier, they are known as all-in-one asset allocation funds, and are the recommended 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 also having a very low management expense ratio (MER) of around 0.2%.

Other Passive Investing Options

Perhaps DIY investing isn’t your cup of tea and you want to take an even more hands off approach. You can instead have your investment portfolio managed for you. Two such options you can use 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 high 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 hold the urge – the best path forward is one that you can stick to, and one that is based on time-tested and empirically-supported strategies. 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.