All of us understand the importance of working hard. But often, the secret to financial success is more than your own sweat – it’s about being smart about your investments and making your money work equally hard for you.
If you’re a first-timer to investing, it can feel daunting to figure out how to start investing in Canada. However, no matter how overwhelming it may seem, we’re here to help you get started!
This article offers an introduction to investing, explains concepts and technical terms, and gives tips on different investments you can pick according to your financial situation and comfort level.
Best Brokerage – Questrade (Get $50 in free trades)
At first, the prospect of trying to decode the process may seem intimidating, and it may seem pointless if you have a small amount of money to invest.
But thanks to advances in financial technology (or “Fintech”), investing is easier and more accessible than ever, and online investing starting small is totally possible. With a focus on simplifying investing, online brokerages and robo-advisors are leading the charge to maximize investment returns by minimizing costs.
Money is one of the most valuable assets you can have. If you don’t use it well or just keep it stashed under the mattress, it loses value over time due to inflation.
But if you put your money to good use by investing it patiently, your net worth rises slowly but surely.
Where to Invest Money In Canada
The first step is to choose an investment provider. Let’s look at the options.
A discount broker does the same job as a stockbroker – facilitating the trading of stocks, with the only difference being that they offer no direct investment advice.
Discount brokerage accounts are usually present via an online platform which essentially provides a self-service option for investors.
The fees charged by discount brokerages are low compared to stockbrokers because you make your investment decisions on your own with little to no help.
Discount brokerages, like Questrade (our top choice), have lowered the barriers for entry into stock trading for average investors. A decision to choose between a discount broker and a full-time stock broker relies on the financial situation, knowledge, and goals of the investor.
More recently, Wealthsimple launched its free stock trading mobile app called Wealthsimple Trade – Canada’s first and only commission-free trading platform where you can buy and sell stocks and ETFs on Canadian and U.S. stock exchanges without paying any trading fees. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $50 cash bonus + $0 commission trades. All you have to do is deposit and trade at least $250. Sign-up today to take advantage of this exclusive offer.
Investors who don’t need advice and have small trade volumes can choose discount brokers. You’ll find a detailed comparison between online brokerages in Canada in our article on The Ultimate Guide to Canada’s Discount Brokerages.
Also, here’s a handy chart of the online brokerages in Canada to help find one that’s right for you:
Online Investing Platform Best For Annual Fees Free ETF Transactions Basic Trading Fees Learn More
Questrade Best Overall & Low Fees $0 Yes $4.95 - $9.95 Visit Site
Wealthsimple Trade $0 commission trades $0 Yes $0 Visit Site
Qtrade Customer Service $25,000 or less = $100
$25,000+ = $0
Up to 100 trades =$0 $8.75 Visit Site
Virtual Brokers Research $25,000 or less = $100
$25,000+ = $0
Yes $9.99 Visit Site
Scotia iTrade Larger Deposits (Over $50,000) $25,000 or less = $100
$25,000+ = $0
Limited $24.99 Visit Site
TD Direct Investing Couch Potato Investors $25,000 or less = $100
$25,000+ = $0
No $9.99 Visit Site
Robo advisors are investing platforms that use a computer algorithm to design and manage your investment portfolio. This creates a hands-off approach to investing.
Robo advisors tend to do things like select investments or investment classes for you, build a portfolio based on pre-defined risk tolerance, and automatically rebalance that portfolio for you.
The core function of a robo advisor is to evaluate a ton of financial data, identify emerging trends, and factor in external threats to chalk out a financial path.
Their algorithms predict the movement of prices of different stocks and thereby provide insightful information on when to buy and sell stocks in your portfolio. Because of this, robo advisors operate in a “set it and forget it” manner.
Robo advisors, like Wealthsimple (our top choice), are useful for first-time investors, as they offer guidance on investing and construct a diversified portfolio based on your personal financial needs.
The robo advisor platform will give advice that’s specific to your financial goals, whether you’re looking to build wealth, buy property, or save up for retirement.
You can find robo advisors in the form of apps or online platforms, each offering a varying fee structure. Some robo advisors come in the form of a high one-time fee while others are a combination of fixed and commission-based fees on each transaction.
If you think a robo advisor might be the best route for you, read our guide to Best Robo Advisors in Canada. Here’s a quick comparison chart we’ve put together as well, so you can determine which path is best for you:
Robo Advisor Best For Young and Thrifty Readers Promo More Info
Best Overall Get $100 when you open your first Wealthsimple account! Visit Site
Big Bank Robo Advisor None Visit Site
Competitive Fees Get your first $10,000 managed free for a year Visit Site
Access to Private Investment Portfolios Get your first $15,000 managed for free for the first year Visit Site
Expert-Assembled Portfolio Receive your first $50,000 managed for free for one year Visit Site
RESPs Receive a cash bonus of up to $500 when you open a new Justwealth account Visit Site
Robo Advisor vs. Online Brokerage vs. Financial Advisor
Ultimately, choosing between a financial advisor, an online brokerage like Wealthsimple Trade or Questrade, or a reputable robo-advisor like Wealthsimple comes down to your individual needs and preference.
While that might seem overwhelming at first, this comparison of a few options can help get you started down the right path:
Situation Which to Choose Why
You like doing your own research DIY with an online brokerage If you enjoy researching stocks, financials, and other information pertaining to investments, DIY with an online broker.
You don’t want to rebalance your portfolio at least four times a year Robo advisor A robo advisor rebalances your portfolio to the original asset allocation in your plan.
You need a high level of personal interaction Financial advisor Go with a financial advisor if you want face-to-face investment advice and financial planning.
You are a new investor Robo or financial advisor If you’re new to investing, a robo advisor or financial advisor can provide investment advice.
You want to invest in individual stocks DIY with an online brokerage Most robo advisors won’t allow you to invest in individual stocks - they need to be a part of an ETF.
You want a hands-off approach Robo advisor If you want to “set it and forget it,” go with a robo advisor.
As mentioned before, a lot of first-timers gravitate to financial advisors, who offer guidance and conduct research on how to invest, as well as overall financial planning and advice.
Of course, this comes at a cost: financial advisors take a percentage off the top of your portfolio each year, regardless of how your investments perform.
Generally, in Canada, that fee works out to a whopping 2% and 3%. It’s why a lot of investors are turning to online brokerages and robo advisors, which are a fraction of the cost.
To help narrow down the options, let us give you our two cents after extensive research comparing what’s on the market today.
For robo advisors, our top pick is Wealthsimple. You can read our full Wealthsimple review to find out why we love it, or simply visit Wealthsimple. Plus, you can take advantage of our exclusive promo offer: open and fund your first Wealthsimple Invest account (min. $1,000 initial deposit), and get a $100 cash bonus deposited into your account.
However, if you want to compare robo advisors in Canada head-to-head, check out our handy chart below and read our Complete Guide to the Best Robo Advisors in Canada.
For online brokerages, our top choice is Questrade because their fees are extremely low and you can design your own portfolio. Read our full Questrade review to find out why we’ve rated it the best online brokerage in Canada.
If zero-commission trades are appealing, Wealthsimple Trade is also an excellent option. You can buy and sell stocks for free on this platform. Promo: Get a $50 cash bonus + $0 commission trades when you open a new Wealthsimple Trade account! Sign-up today to take advantage of this exclusive offer. Read our full Wealthsimple Trade review for an in-depth look at the platform.
For all the info on online brokerages, read our Ultimate Guide to Canada’s Discount Brokerages.
Constructing the Optimal Portfolio for Your Needs
First, consider your needs and your ability to take risks before building your investment portfolio. A recent university graduate would have an entirely different portfolio as compared to a person close to retiring.
The more risk you’re willing to take, the more aggressive your investments will be. This means a large pool of funds for a risk-taking investor will be allocated to equities and bonds while fixed-income assets will constitute a lower value.
An aggressive risk-taking portfolio can contain almost 90 percent in stocks, 5 percent in bonds, and 5 percent in cash for setbacks.
A conservative portfolio is geared towards people who want to take on less risk. The main aim of a conservative portfolio is to retain its value and protect the investor from losses. A conservative portfolio would comprise 40 to 60 percent fixed income securities like bonds and the rest in a mix of stocks and cash, to provide a cushion for any rebalancing required.
Once you’ve selected the composition of your portfolio, now consider the different stocks and bonds you’d invest in.
There are different types of stocks, with some offering higher dividends as opposed to others but lower capital gains. On the same note, there are different types of bonds with varying maturity dates and interest rate payments.
Once you’ve built your portfolio, you’ll need to keep assessing it since market conditions might distort your preferred percentages of each asset class.
Even if the market doesn’t erode the percentages, your preferences might change. After accumulating enough capital, you might be encouraged to take on more risk. Here, you must reassess your portfolio composition.
While rebalancing your portfolio under your risk tolerance, always remember the tax impact and market trends.
If you believe that a particular industry or company in your portfolio will fall in value, you need to sell it off. Do this only after looking through market reports and research. You could also consider using value investing.
When constructing and rebalancing your portfolio, always remember that diversification is a vital key to success. Never let your portfolio rely too heavily on a particular industry or bond type.
A well-diversified portfolio is more sustainable and hedges you against unforeseen changes in the economy.
Types of Investments
There have been many developments in the world of finance in terms of creativity over the years. Investors can now choose from a diverse pool of securities to invest their money and seek a return.
Discussed below are some paths open to everyday investors looking for a return on their money.
Stocks are the shares (parts) of a company listed on a stock market for people to purchase. Every stock owned by you represents your ownership in a company. With ownership come voting rights and a portion of the profits earned by the company. Most stocks today are available as common stocks.
Common stocks give the holder the right to vote and elect the board members of a company, (i.e. the individuals in charge of major decision-making).
Common stocks also represent a portion of profits distributed by the company in the form of dividends. Payment of these dividends takes place annually or semi-annually, depending on the company’s policy.
From a long-term standpoint, common stocks yield a higher return as compared to other financial securities in terms of capital gains. Capital gains are the increased returns of an investor caused by an increase in stock price.
There is no upper limit to the price ceiling of a stock price as it depends mainly on two factors:
- The company’s financial health, and
- Market speculation
However, there is a downside. If bankruptcy occurs, the stock price could hit zero, resulting in almost no returns for the investor.
Historically, stock markets have provided the most favourable returns. They’re also relatively liquid and regulated which ensures that companies can’t (legally) offer misleading financial statements.
For conservative investors who don’t like altering their principal amount (number of shares), consistent dividend-paying stocks are the best.
The stock market is a level playing field for all investors. The sooner you start, the better it is, as you can accumulate more wealth.
Bonds are issued mainly by companies, governments, and municipalities (provinces/cities) to raise cash in exchange for timely payment of interest on a fixed rate.
Bond issuers are primarily looking to raise some money through debt. In exchange, they pay interest payments and finally the principal amount after the period. It’s basically like a loan agreement.
Bonds vary in duration of their length. Some bonds are issued for six months, some for five years, and some Canadian bonds are even issued for greater than ten years.
The greater the length of the bond, the higher the interest rate on it. The timeline of when a bond is set to expire is called the maturity date, and on this date, the issuer repays the full amount to bondholders. There are two ways to get a return by investing in bonds:
- The first is the straightforward way of holding the bonds till maturity date while collecting the interest payments and then eventually collect the principal amount on the maturity date. The timing of interest payments on bonds depends on the issuer, but it’s usually twice a year.
- The second way is to sell them at a cost higher than what you paid for.
In finance, a higher risk bears a higher reward and vice versa. Bonds are considered a lower risk investment than the stock market because you’ll get your interest payment until the company defaults.
The best evaluator for a bond’s worth is to use the standards set by bond rating agencies. Higher-rated bonds earn lower interest rates and sell for higher prices, whereas lower-rated bonds offer higher interest rate as they’ve got a risk of default.
Bonds are generally considered a safer option than the stock market. Since they’re considered less risky, their returns are also significantly lower than the stock market. People who don’t want to take risks or have heavily invested in the stock market can consider diversifying their portfolio with the purchase of bonds.
An option grants the holder the right, but not the obligation, to buy (call) or sell (put) shares of a company at a stated price (strike price) at a specific date.
There are two kinds of options, namely American and European. European options only allow the option to be exercised at a particular date, whereas the American option can be exercised at any time between purchase and expiration date.
There are two main stock options widely available in most stock markets: calls and puts.
- A call option gives you the right but not the obligation to buy shares of a company at a specific price, called the strike price, within a limited time frame (or a particular date if a European option occurs). A call option is bought when the investor anticipates a rise in the stock price or underlying security.
- A put option is a contract granting the holder the right, but not the obligation, to sell shares at a stated strike price within a set period. A put option is bought by an investor who anticipates a drop in the future price of a stock or the underlying security.
Mature investors can also hedge against risk by choosing an options strategy, which involves the use of call options and put options.
In an options spread strategy, investors purchase and sell the options for the same underlying stock or asset but at a different strike price and/or expiration date.
Options are exercised by investors who believe that a particular stock price or asset price will fall or rise but don’t want to put up a lot of cash up front.
Options are valued based on their premiums (i.e. the amount of money that’s paid to the seller of an options contract).
The premium of an option is primarily based on the strike price along with other factors such as volatility of the asset and expiration date of the contract.
Options are garnering a lot of attention due to their profitability but also remain one of the riskiest paths to take as they can decrease the value of a portfolio drastically in a short period.
Trading in options is most definitely not a strategy that should be sought out by beginners.
It should be exercised after considerable exposure to price movements in the stock market or the underlying security/commodity.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (or ETF) is an investment fund that lets you buy a large pool of individual stocks or bonds in one purchase.
It tracks stock indexes like the S&P 500, different commodities, bonds or a bunch of assets grouped together.
It’s easy to confuse ETFs with mutual funds (to be discussed later) as they also offer a bundle of different investable assets.
ETFs trade like a standard stock on the stock market with price fluctuations being observed as they’re traded.
Most well-known ETFs track stock market indexes, but lots of different ETFs follow commodity prices, foreign currencies, and bonds among different groups of assets. In simple terms, an ETF is a fund of different assets (stocks, silver, oil, different securities, etc.).
It distributes ownership of the whole pool of assets into a single share ready to be traded like a common stock.
Besides making capital gains on ETFs, investors also benefit from profits distributed in the underlying ETF asset pool such as dividends and interest rates.
ETFs are a good option for people looking to invest for higher returns but with little financial knowledge. Such folks can invest in well-known stock indexes without worrying about individual company stock prices or performance.
A mutual fund is essentially a pool of various stocks and bonds grouped together in a single investment portfolio. The managers of the fund assimilate the different assets into shares and calculate the share price daily under the price fluctuations of each asset within the pool.
Investing in a mutual fund differs from shares or bonds as the pool represents a collection of various assets. Investors earn money when the stocks within the pool generate dividends and on interest payments from the bonds. Assets sold by the fund at a higher price also create a capital gain distributed by the fund to its shareholders.
Mutual funds are best for people with deep pockets but no interest or knowledge of the financial world. Mutual funds are managed by Fund Managers who get paid even if the fund incurs a loss.
Other Types of Investments
The securities listed above are the most common (and our highest recommended) forms of investment.
Here are a couple of others that we recommend after you’ve tested those:
People who aren’t comfortable with financial instruments can choose more conventional markets such as real estate. Though it requires higher cash upfront than bonds or stocks, there is an increasing number of real estate portfolios where you can invest a relatively smaller amount for a tiny piece of a real estate project.
For people who aren’t well-versed with the housing market, companies like Roofstock offer vetted homes ready to be sold and rented out.
As technology progresses, so do the methods of investing. Termed as the future of finance, cryptocurrency is essentially a digital form of currency not regulated by any central bank.
Instead, it’s managed by the people who use it and buy it. As trust in banks erodes, cryptocurrencies are garnering attention as an alternative to conventional currency.
There are even crypto-exchanges and indexes emerging which facilitate investment in this alternate financial instrument.
Wealthsimple has launched Canada’s first regulated cryptocurrency trading platform called Wealthsimple Crypto. Users can buy and sell Bitcoin and Ethereum using Wealthsimple Crypto, which doesn’t hold your crypto assets directly in hot or cold wallets but instead has its custodian exchange Gemini hold the assets.
The drawback to investing in crypto is there are no perfect indicators for predicting the price of cryptocurrencies. It’s purely based on individual demand and supply speculation.
The drawback is there are no perfect indicators for predicting the price of cryptocurrencies. It’s purely based on individual demand and supply speculation.
Believe it or not, there are ways to invest tax-free in Canada. Here are some of the best options:
Registered Education Savings Plan (RESP)
An initiative undertaken by the government of Canada, a Registered Education Savings Plan (RESP) promotes savings in the form of an investment in a child’s post-secondary education. The government allocates a certain percentage to match the contributions under the plan for children under the age of 18.
The government kicks in an extra 20% up to a maximum of $500 annually per child, and a lifetime total grant of $7,200 per child.
If the child doesn’t attend an eligible post-secondary institution or training program, then the sponsor of the RESP will get back their original contributions tax free (since RESP contributions are made with after-tax income). The sponsor may be able to transfer the investment earnings to their RRSP tax free (if they have enough contribution room), otherwise they will pay income taxes on the investment earnings at their marginal rate. All grant money, however, must be repaid to the government.
The RESP is easy to start and provides a strong incentive to save for a child’s education. The drawback is that any funds that get drawn out from the plan and spent on purposes other than education result in a 20 percent penalty in addition to income tax.
Many Canadians grapple with whether to save for their child’s education or their retirement, so read our article on RESP vs. RRSP.
Tax-Free Savings Account (TFSA)
Introduced in January 2009, a Tax-Free Savings Account (TFSA) is a registered account in Canada that offers special tax benefits. Within a TFSA, you can hold any type of savings or investment account – cash, GICs, mutual funds, stocks and bonds – and any income earned is tax-exempt (even when withdrawn).This means any earnings are compounded tax-free over time. Canadians who were at least 18 years of age in 2009 have up to $75,500 in cumulative TFSA contribution room as of Jan. 1, 2021.
If you’re confident managing your own portfolio, you can open a TFSA with an online brokerage like Wealthsimple Trade or Questrade. If you’re a new investor or feel more comfortable with someone else doing the hard work, choose a robo advisor like Wealthsimple or Questwealth Portfolios.
For more information, read our article to find out how to invest your TFSA.
The maximum amount in 2021 you can contribute to a TFSA saving or investing account is $6,000. That means you can deposit no additional funds beyond that limit for that year, plus any unused amount carried forward from previous years.
You can withdraw funds from the TFSA at any time while incurring no taxes on the gains you made. However, you won’t be able to replace the amount of withdrawn until the following year. Otherwise, a 1 percent penalty is imposed each month until the extra amount is withdrawn from the account.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan is an initiative by the Canadian government to promote saving for retirement.
Pre-tax income is deposited in an RRSP account where the money increases with no charging of taxes on any gains realized. This remains the case until the money is withdrawn.
Funds deposited in an RRSP account enjoy tax-free gains on dividends, capital gains, and even interest rates. RRSP holders can withdraw their funds at retirement when taxed much lower as compared to when they were working.
Like a TFSA, you can open an RRSP with an online brokerage like Wealthsimple Trade or Questrade, or a robo advisor like Wealthsimple or Questwealth Portfolios. Many asset classes are approved for RRSP. These are:
- Mutual funds
- Foreign currency
- Savings account
With RRSPs, you get a tax deduction in the year you make a contribution. An RRSP account holder may withdraw funds at any time, though they’re taxed when they do.
How Much to Invest
This puzzles most investors when starting to take their first steps in their financial world. The answer lies mainly with your investment goals.
The first step is to form a correct balance between investments and savings. Savings are necessary to hedge you against any emergencies that might prop up. The percentages are up to your preferences in risk-taking and financial goals.
To start investing, you need to have some form of savings to start off with. After that, you can allocate a fixed part of your income towards investing and saving.
For recent post-secondary grads who know how to live on a budget, an extreme rule of thumb is to save at least 60 percent of your salary.
Those who are more settled and/or have a family to look after should save and invest at least 30 percent of their income.
20 percent of this should be geared towards investments that could be used for saving towards important milestones, like retirement and children’s education. The remaining 10 percent should be saved.
One thing you should remember about investing is that the more you invest today, the faster you’ll reach your financial objectives.
Every dollar not being invested is being eroded by the curse of inflation.
Not that you should take this rule to an extreme, but many investors who re-invested most of their gains are now multi-millionaires (and billionaires) such as Warren Buffet and Kevin O’Leary.
It’s no secret that you have the most to gain from investing early. But here’s what many people forget: you don’t need a huge wad of cash to get started.
For instance, if you’re looking to invest a small amount of money (e.g. $1,000), you can easily open and fund an account with Wealthsimple. They don’t require a minimum account balance to put your money to work.
Technically speaking, they build portfolios using fractional shares – which means that your money can be placed in the same broadly diversified baskets regardless of whether you’re investing $100 or $10,000.
In the cases where there is a minimum, like with Questwealth Porfolios, your money won’t be invested until you reach $1,000 in your account.
You can, however, set up a recurring deposit that’ll get you automatically invested once the balance reaches the threshold.
The lesson here? Open an account and get investing no matter how small the amount.
General Tips for Online Investing
To close it up, I’ll give you two quotes I think are incredibly powerful when it comes to thinking about how you invest.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” -Benjamin Graham
A fundamental rule of investing is that when the market pendulum swings to a side, swing to the other side. This implies that when the whole market is in a buying frenzy, gear towards selling and vice versa.
This philosophy further entails keeping your emotions in check and not giving in to market pressure or hot stocks that everyone is talking about. Most people suffered terrible losses when they jumped on the bandwagon of the dotcom bubble during the late 1990s.
However, investors with a level head and impulse control steered clear of market speculation and avoided such losses.
“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett
Always remember to stay focused on your goals and not give in to short-term gains. Investing requires patience and a clear head. The stock market is ripe with speculation and educated guesses that result in minuscule swings sending traders into a panic.
Stick to your strategy and think long term. If your investment is in a stable/healthy company, the gains will show up eventually overtime regardless of market speculation.
Our Take On Investing Amid COVID-19
You’re probably wondering if now is a good time to invest? After all, we’re in the midst of a global pandemic and the future has never been more uncertain.
There’s no need to gaze into a crystal ball and try to time the market. That’s a fool’s errand. Just set-up small, frequent, automatic contributions from your chequing account into your RRSP or TFSA. It’s that easy.
I’ve been there. I started investing on my own near the end of the financial crisis of 2008-2009. Markets were downright scary.
But 10 years later my retirement portfolio was well into the six-figure territory and I haven’t looked back. This too shall pass, and you’ll be glad you started today.
Investing During a Market Downturn
You’re probably wondering: if now is a good time to invest? After all, we’re in the midst of a global pandemic. Markets have fallen, and the future has never been more uncertain.
The truth is, this is a great time for young investors to get started. Markets have already fallen 25-30% off their all-time highs.
As a net buyer of stocks for the next several decades, today’s market turmoil should dissuade you from investing for retirement.
There’s no need to gaze into a crystal ball and try to time the market. That’s a fool’s errand. Just set-up small, frequent, automatic contributions from your chequing account into your TFSA or RRSP investing account. It’s that easy.
I’ve been there. I started investing on my own near the end of the financial crisis of 2008-2009.
Markets were downright scary. But 10 years later my retirement portfolio was well into six-figure territory and I haven’t looked back. This too shall pass, and you’ll be glad you started today.
Learning how to invest doesn’t occur overnight. It’s a long process that often includes failing quite a bit. I’ve failed many times as an investor, but as long as you fail fast and learn from your mistakes, you can figure out the complexities of the stock market in no time.
That being said, there are other options to invest your money that are safer and require little to no effort or knowledge. Just know you’ll end up paying a premium for these options.
Regardless of what you choose, know that investing is critical, and you’re losing money by not putting your money to work for you. The question is – what will you do now that you have this knowledge?
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