Comprehensive Guide on How to Buy Stocks in Canada

Wondering how to buy stocks in Canada, but have no idea where to start? You’re not alone: 4 in 5 millennials are saving money every month, but only half of us are investing in stocks.

Luckily, with online brokerages and robo advisors, investing in stocks is easier than you think.

Open a self-directed account with an online brokerage like Questrade (our #1 choice).

Here’s an introduction on how to buy stocks in Canada:

How to Invest in Stocks

Gone are the days when investors had to call up a stockbroker to make a trade. The advent of discount brokerages has made stock investing so much easier over the years. Today, investors can use an online stock trading platform like Questrade or Wealthsimple Trade to buy and sell stocks. You can get started with these five steps:

1. Open a self-directed account with an online brokerage like Questrade (our #1 choice).
2. Open an RRSP, TFSA, or non-registered (taxable) investing account.
3. Set up automatic deposits: Link your investment account(s) with your chequing or savings account so that you can transfer funds.
4. Pick your investing approach: The key is to put together a broadly diversified, balanced portfolio.
5. Have money ready to invest: You don’t need big bucks to get going. You can invest with as little as $100.

Let’s look at the options for how to invest in stocks in Canada.

Step 1: Open an Online Brokerage Account

Discount brokerages provide an excellent online trading platform for DIY investors to buy and sell securities on their own instead of relying on a human broker to execute transactions. The fees for discount brokerages are rock bottom and with a little know-how, DIY investors can take advantage of:

• The flexibility to choose and manage your own investments, including commission-free ETFs
• Low per-transaction trading costs and low management fees (around 0.15% to 0.5%)
• Access to real-time data, research tools and analysis

As a DIY investor, you can do your own stock-picking research and investment decisions. Fortunately, figuring out how to invest online in Canada is fairly simple, and buying stocks with an online brokerage can be as easy as entering a stock ticker symbol and the quantity of stock before hitting the “Buy” button.

Every big bank in Canada has its own discount brokerage arm, and for many do-it-yourself investors, this can be the most convenient way to start investing on their own. But, if you’re like me, eventually you’ll get tired of paying $9.99 every time you buy or sell a stock or ETF. So why not set yourself up from the beginning with an online broker that doesn’t charge commissions?

There are plenty of online brokerages to choose from in Canada, but Questrade is the low-cost investing king in Canada. DIY investors have been using Questrade for its rock-bottom fees and excellent customer service for more than 20 years. Opening an account is simple – just use our link to sign-up for an account, open an RRSP, TFSA, or non-registered account, and you’ll get $50 in free trades. With their rock bottom low fees, including free ETF purchases, and super easy online trading platform, Questrade is consistently our top pick for the best online brokerage in Canada.

Wealthsimple Trade is also a great option, as it doesn’t charge any commissions on buying individual stock or ETFs trades. Read our comprehensive comparison on Wealthsimple Trade vs. Questrade.

Step 2: Invest an RRSP, TFSA, or Non-Registered Account

If you’re just getting started with investing you need to decide whether to invest inside of an RRSP, TFSA, or a non-registered account.

An RRSP gives you a tax deduction on contributions, but you’ll pay income taxes on withdrawals. In contrast, you don’t get a tax deduction for TFSA contributions, but you can withdraw funds tax-free. Both RRSPs and TFSAs offer tax-sheltered growth on investments – meaning there are no taxes on your contributions, dividends, capital gains, or any other interest earned within the account.

Debating TFSA vs. RRSP? A general rule of thumb is that an RRSP makes sense for high income earners, while a TFSA makes sense for lower income earners. And if you can afford to contribute to both, that’s great – do that! If you’re leaning towards a TFSA, check out The Best TFSA Investments in Canada to help you get started. Only once you’ve maxed out your RRSP and TFSA does it make sense to open a non-registered or taxable account to invest.

Most online brokers support multiple account types such as joint investment accounts, corporate accounts, or Locked-in Retirement Accounts (LIRAs).

Step 3: Set up Automatic Deposits 

Now that you’ve opened your online brokerage account and decided on an account type (or types) to open, you’ll need to fund your account to start investing. This is easy – just link your chequing account or savings account to your brokerage account and transfer funds. Most brokers will also allow you to set up automatic deposits from your chequing account so you can fund your account regularly every time you get paid.

Another way to fund your account is to transfer existing investments. from an existing bank or investment firm. You can transfer funds either “in-kind”, meaning the investments you held at your previous institution would simply transfer over to your new broker account as is; or transfer funds “in cash”, which means those funds would be sold and then the cash would be transferred to your new account for you to start investing.

Step 4: Pick Your Investing Approach

Your account is funded, and you’ve set up regular ongoing contributions. Hopefully, you’ve thought long and hard about your investing approach and what type of investments you’re going to purchase.

Index Investing

The easiest approach to take is a relatively hands-off index investing or passive investing approach. With an indexing strategy, you simply buy an ETF or index mutual fund that tracks a broad stock market index, like the S&P 500 or TSX Composite Index. You can build a diversified portfolio with just one-to-four ETFs that make up the Canadian, U.S., and International stock markets, plus corporate or government bonds.

Dividend Investing

There are pros and cons to dividend investing, but some investors like the idea of building up a portfolio of dividend stocks. These stocks – particularly the ones that increase their dividend pay-outs annually – tend to perform exceptionally well over the long-term, thanks to their tilts towards the value factor and profitability factor.

Sticking with blue-chip dividend stocks can help investors weather any market storm, as those steady dividend payments keep coming in even when markets are rocky.

Growth Investing

Maybe you’d prefer investing in companies with strong prospects for growth. Whether it’s Amazon, Facebook, Netflix, or Tesla, we all have our favourite “story” stocks and it can be enjoyable to invest your money in these companies and go along for the ride.

Growth stocks tend not to pay dividends – at least until they become more mature (like Apple) but have the potential to earn capital gains.

Step 5: Have Money Ready To Invest

These days, investors don’t need thousands of dollars to start investing in stocks. When you use a discount broker like Questrade, you can get started with as little as $100 and not have to worry about being dinged for high transaction fees every time you buy a stock.

In the beginning, your savings rate matters much more than the rate of return on your investments. Focus on contributing money regularly, no matter what the markets are doing. You’re building the habit of saving and investing for the long term.

Contributing small amounts regularly is also known as dollar-cost-averaging and it’s a great way for investors to build a sizable portfolio a little bit at a time.

How Do Stocks Work?

After buying a stock (or a “share”), you receive ownership over a small portion of the company. As an owner, you’re entitled to a cut of the company’s profits. The more shares you buy, the higher your stake in the company. For example, if a company comprises 1000 shares, and you purchased 100 shares, you would own 10% of the company.

Being a shareholder can come with certain privileges, including the right to receive dividend payments and the right to vote at shareholder meetings.

Types of Stock

Corporations typically issue two types of stock:

• Common stock: Shares are usually purchased at a price set by the market and represent ownership in a company. You can make money from investing in this type of stock either through stock appreciation or dividend payments. However, not all stocks offer dividend payments. Owners of common stock get to vote at shareholder meetings.

• Preferred stock: It blends the elements of bonds and common stocks and bonds: the ownership and potential appreciation features of common stock combined with the consistent income a bond provides. Preferred stock has a stated par value, such as $100, and the dividend payment is a percentage of this. Preferred stock comes with more risk than investing in company bonds or common shares. Shareholders also get no voting rights, but do get top priority on claims to a company’s assets and income.

How to Pick Stocks

Choosing individual stocks takes research. There are different ways to evaluate how any stock is priced. With sophisticated research tools, brokers like Questrade can help both new investors and seasoned pros evaluate and analyze their investment choices. But here are a few approaches to picking stocks:

• Value Investing Approach: Start with basic metrics such as price-earnings ratio, dividend yield, earnings-per-share, and price-to-book ratio. Your broker’s tools should include stock screeners that sort individual stocks based on one or more of these metrics so you can make an informed decision on which stocks to pick. This is called a value investing approach – one that has helped billionaire investor Warren Buffett be so successful. It works because companies with low price-to-earnings and low price to book tend to be undervalued by the market. By picking these value stocks, an investor is anticipating an increase in share price as these out-of-favour companies start to shine once again.

• Dividend Investing Approach: Fans of dividend stocks might be hungry for a higher dividend yield or look for stocks with a high dividend growth rate – that is a history of increasing their dividend payouts every year. By screening for dividend stocks based on yield and growth, an investor can build a portfolio of dividend-paying dynamos. Note that dividends are not guaranteed and that one way to screen for companies at risk of cutting or eliminating their dividend is to look at a company’s dividend payout ratio. If it’s over 100%, that means the company is paying out more in dividends than it earned in net income. Usually a recipe for disaster. Finally, if it’s growth you’re after, start by screening for stocks based on high earnings-per-share and high sales or revenue growth.

No matter how good you think you are, stock picking is hard. Even with the best research and sophisticated analysis, professional investment managers struggle to get things right. There is just no way to know for sure if the future price of a stock will go up or down. For picking individual stocks, it is very possible to win sometimes – just be prepared to lose too. That risk is only part of the process. Here are a few tips to get you started:

Start Broad

We highly recommend when you first start investing to start broad. This means that you shouldn’t pick individual stocks out of the gates. Instead, get comfortable with investing and pick a few ETFs, index funds, or mutual funds. This is a great way to help you understand how the market works, keep costs down, and instantly diversify your portfolio.

Once you’re more comfortable with investing (or if you’re already a step ahead), then an excellent place to start is by looking into value investing. Value investing is a methodology initially created by Benjamin Graham but is the foundation of investment strategies for folks like Warren Buffett today. This requires extraordinary patience and discipline, as well as crucial know-how when choosing stocks.

Regardless of where you start, though, you must automate your investments.

Automate Your Investments

When you arrange to have a set amount of cash to be deposited into your investing account each month, it’s considered automatic investing. For instance, you could set up a $100 transfer from your chequing account on a set day every month, and it will be instantly deposited into the account. This may seem like nothing at first, but $100 a month over 30 years at a modest 6% return equals over $100,000 in cash. By automating your investments, you are “paying yourself first” and prioritizing your financial goals, just like you would for housing, food, or paying other important bills. Such a strategy ensures your investments will keep growing and removes the temptation to time the market.

Robo Advisors

If the DIY route is intimidating and you’re not ready to pick stocks yet, you can still invest in stocks with the help of a robo-advisor. Robo advisors will automatically create a diversified, balanced portfolio based on your individual preferences, like time horizon and risk tolerance. Plus, their fees are much lower than a bank or brokerage — saving you even more money eventually.

Once set up, your portfolio is managed automatically using sophisticated software algorithms. With robo advisors, you benefit from:

• Investments selected and managed for you
• A fixed portfolio that matches your risk tolerance
• Low annual management fees (under 1%)
• Not having to re-balance your portfolio once a year

The bottom line: robo advisors are an excellent alternative for investors who don’t want to do the work themselves, but also want to avoid high fees charged by a full-service brokerage.

With its low fees, easy-to-use platform, and excellent customer service, Wealthsimple is our top choice for the best robo advisor in Canada. Here’s another excellent reason to sign-up: those who open and fund their first Wealthsimple account with $1,000 will get a $100 cash bonus. However, if you want to compare robo advisors in Canada head-to-head, read our Complete Guide to the Best Robo Advisors in Canada.

Smart Investment Strategies to Reduce Risk

Stock prices are volatile by nature. They’re up one day and down the next depending on things we can’t control – like company performance, industry trends, or politics. There’s simply no way to tell how well a stock will do, regardless of how well it’s done. When it comes to the risk of market timing, there are a few things you can do to protect yourself:

Diversify Your Portfolio

Don’t keep all your eggs in one basket. “Diversification” means holding as many eggs (companies) in as many baskets (industries) as possible. This way, if one company or sector fails, you won’t lose your shirt because you still have money invested somewhere else.

Diversifying a portfolio with individual stocks can get pricey and will take time for a new investor. If you’re a new investor, consider starting with ETFs. For example, buying the broad market iShares CDN Composite Index Fund (XIC) ETF means you’d be invested in 237 companies, instead of just one.

The overall price of the ETF can still go down, but it won’t fluctuate as much if a few of the 237 companies aren’t doing well at any point. The ETF price will eventually go up as the companies collectively do well.

Invest in ETFs and Index Funds

Exchange-traded funds (or ETFs) are a bundle of stocks packaged together to copy the performance of a stock market index. Basically, it’s an investment fund that lets you buy a large basket of individual stocks or bonds in one purchase.

Smart investors don’t try to beat the market, and instead, try to match total market performance by putting their money into low-fee funds, such as index funds and exchange-traded funds, which hold all (or nearly all) the stocks or bonds in a particular index. Then, they check on their portfolio once a year. Read more about Index Funds vs. ETFs: Main Differences.

Have Some Lower Risk Investments

As a responsible investor, you should also set have some lower-risk investments in your portfolio. It’s true that it will have a lower return compared to high-risk investments (like individual stock), but building a balanced, diversified portfolio is your best defence against market volatility. For instance, you could also open a high interest savings account or buy a  Guaranteed Investment Certificate (GIC). Check out The Best Low-Risk Investments in Canada for all the info.

What Is Dollar-Cost Averaging Approach?

Dollar-cost averaging is all about investing your money in small, regular intervals over time. The idea is to avoid the emotional pitfalls of trying to time the market in one lump sum. Instead, you set up a rules-based approach and hopefully making your contributions automatic, so you don’t even have to think about it.

Stock prices are constantly moving up and down. By sticking to a regular contribution schedule, you either get more or fewer shares with each purchase. So, is it better to invest the entire lump sum at once or to “dollar cost average” your contributions over time?

Research has shown that investing the entire lump sum at once, as early as possible, leads to a better outcome (66% of the time) over dollar-cost averaging. That’s because markets tend to go up two out of every three trading days, meaning the more time your money is in the market, the better your outcome will be.

However, investing an entire lump sum at once can be emotionally difficult for investors. Think about how you’d feel if you invested $100,000 at once and then the markets started to fall. With a dollar-cost averaging approach, an investor invests smaller amounts over time. You’d dollar-cost-average your way into the market and hope to avoid the loss aversion that would come from a big market drop right after you invested the entire amount.

Can You Buy Stocks in Canada Without a Broker?

It is possible: some established companies will let you buy stock from them without a broker through a direct stock purchase plan (DSPP). DSPPs were conceived ages ago to let smaller investors buy shares without going through a full-service broker.

You can also buy stocks without a broker through a company’s dividend reinvestment program (DRIP). DRIPs let investors automatically reinvest cash dividends to buy more shares. This helps to save on trading fees for investors that reinvest their dividends regularly.

While investing without a broker is possible, there isn’t any reason to avoid opening a brokerage account. These days, you might consider this as an add-on option. Individual companies will have their own specific instructions on how to sign up for these plans, search for them online if you’re interested.

Buying Stocks in a Market Crash

Unless you’ve been living under a rock, you’ve noticed that stock prices have crashed due to the coronavirus pandemic. Markets fell swiftly, as much as 30% in just one month, and no one knows for sure how bad this will get or how long this will last.

That doesn’t mean it’s a bad time to invest in stocks. In fact, experts say that investors can profit during a market downturn and it’s one of the best times to start investing. Some companies have held up remarkably well during the market crash. What kind of companies thrive during these unprecedented times?

Think about it: we’re all home and watching more Netflix than usual. Those of us working from home are using video conferencing software like Zoom. All of us, even those who are self-isolating, need groceries. U.S. grocery giant Kroger has benefitted greatly. And since we’re all washing our hands obsessively and disinfecting every surface regularly, companies like Clorox are cleaning up (no pun intended).

Look for companies like these who can not only survive but thrive in difficult times. Chances are the stocks that performed well in the first quarter of 2020 may be poised to come out of this crisis in a strong position compared to the rest of the market.

Last Word on How to Invest in Stocks

All said and done, choosing between different online brokerages or robo advisors comes down to finding the one that best suits your needs. If you’re comfortable with DIY investing and you’re ready to pick stocks, give an online brokerage like Questrade a try. Since you get $50 in free trades when you start investing with Questrade, it’s an excellent way to test-drive the trading platform.

If you’re worried about the time it takes to learn about how to invest in stocks in Canada, consider starting with a robo advisor like Wealthsimple that can set up a portfolio of ETFs until you figure out the ins and outs of DIY stock picking. For a limited time, Young & Thrifty readers get an exclusive $100 cash bonus deposited into their account when they open and fund a Wealthsimple Invest account (min. $1000 initial deposit). It’s a good way to test the waters before starting to pick your own stock with an online brokerage like Questrade.

Whatever you decide, experts agree that investors with the patience to hold a broadly diversified portfolio of investments over a long period, say 20 years, have the best chance of positive gains Don’t let the fear of the stocks keep you from the rewards that come from investing. It takes a while to learn how to swim, but if you invest early and invest often, you’ll find that you can keep swimming until you eventually reach a beautiful sunny little beach.

Key Definitions

Here are a few key terms and core concepts of Stock Market Terminology you should know before diving into the investment world: