How Do Stocks Work In Canada What are stocks? Defining what is stocks may seem like a pretty straightforward task, especially with the familiarity of Monopoly board games helping you understand stocks. You can buy ‘100 shares of Mars or Old Kent’ for $40,000 in your virtual bank account, slap an attractive SpaceX sticker on it, and flip for a modest profit in a few short turns around the board. Well, congratulations on winning with the most money! But that doesn’t really mean you know stocks. What are “Stocks”, Really? Read on to answer that question.
How Do Stocks Work In Canada? Is it worth investing in stocks in Canada? These questions and more can be answered in this article.
How To Invest In Stocks In Canada
Getting started as an investor in Canada is the easiest it has ever been.
You don’t need a tonne of money to start trading stocks, and you can open a brokerage account online. While you can buy stocks with as little as $100, we recommend setting aside a little more to save on the trading commissions that pile up when you make multiple small trades.
Also, some brokerage platforms have a minimum investment requirement, and we will note them in this guide.
Here are the key steps you should take to begin investing in stocks:
1. Open an Online Brokerage Account
Investors who purchase stocks directly through a broker are also referred to as “self-directed” or “Do-it-yourself” investors.
This approach requires you to do your own research before picking a stock. You are also responsible for allocating assets within your investment portfolio and keeping it diversified.
Online brokerage platforms in Canada vary from independent discount brokers to brokerage firms owned by big banks.
Discount brokers such as Wealthsimple Trade and Questrade can save you a lot of money in trading fees and commission.
2. Choose an Investment Account
Canadians can invest using registered or non-registered accounts. Popular registered investment accounts include:
Tax-Free Savings Account (TFSA): A TFSA offers an opportunity to invest and earn tax-free returns forever. You can use this account to save towards short- and long-term goals, including retirement.
Each year, the government gives Canadians who are 18 years or older a contribution limit. For 2021, the TFSA contribution limit is $6,000.
Registered Retirement Savings Plan (RRSP): An RRSP is used to save for retirement and defers taxes on your earnings until you make withdrawals.
You can contribute 18% of your previous year’s income up to a maximum amount. For 2021, the maximum RRSP contribution limit is $27,830.
Registered Education Savings Plan (RESP): This investment account is used to save towards a child’s post-secondary education. In addition to your contributions, the government provides up to $7,200 in free grant money.
You can also invest your stocks in a non-registered account that is for personal or business purposes.
3. Analyze Stocks and Invest
After deciding on what account you want to invest in, it is time to do your research before buying a stock.
Whether you are looking for growth or value, stock analysis can be broadly divided into fundamental and technical analysis.
Fundamental analysis uses available company data to determine its financial health, intrinsic value, and potential for growth.
Using the company’s financial statement (balance sheet, income, and cash flow statements), some basic stock performance indicators are:
- Earnings per Share (EPS)
- Price to Earning (P/E) ratio
- Dividend payout ratio
- Return on Equity (ROE)
- Debt to Equity Ratio
- Price to Earnings Growth (PEG) ratio
Other factors that come into play here include a company’s management, its competitive ranking in the industry, branding, intellectual property, and more.
Technical analysis involves the use of charts and historical price patterns to forecast a stock’s future price. This analytical method is used by traders (day traders) to make buy and sell decisions.
Popular technical analysis indicators include:
- Support and resistance levels
- Moving averages
- Relative strength index
- Trend channels, and several others
Brokerage platform may offer access to charting tools or you can use a stock screener.
Analyzing which stock to buy can quickly get you into the weeds. There is no end to dissecting a stock/company and prognosticating what it may or may not do in the future.
Beginners should focus on fundamental analysis and make it a priority to understand what a company is about and its prospects for the future. Keep things simple.
How to Invest in Stocks: A Step-By-Step Guide
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,
- Low- or even commission-free trading
- Low ETF management fees (around 0.15% to 0.5%)
- Access to real-time data, research tools and analysis
Step 2: Open a Tax-Sheltered Investment 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 retirement. In contrast, you don’t get a tax deduction for TFSA contributions, but you can withdraw funds tax-free at any time. Both RRSPs and TFSAs tax-shelter your investments. Meaning there are no taxes on your investment income like dividends, capital gains, or interest earned within the account.
Step 3: Fund Your Account
You can’t invest in stocks without money! Once your brokerage account has been opened, you need to fund it. Ideally, you should be starting with at least $1,000 in your account to invest in the stock market, but more is always better.
Once you make your initial deposit to your investment account, you should also set up an automatic monthly or bi-weekly contribution. This ensures you are consistently building your portfolio and always have cash to take advantage of market dips!
Step 4: Pick Your Investing Approach
When it comes to investing in the stock market, you need a plan. If you don’t have a trading plan, you’re likely to make emotional decisions instead of financial ones, and can end up worse off than if you had not invested at all!
Step 5: Research Stocks and ETFs to Buy
Once you have an idea of your portfolio strategy, it’s time to research your investments. Doing so is fairly straightforward, and can even be done directly in your brokerage account.
I personally like to use a website like Yahoo! Finance or Marketwatch to research my stocks. You can look up stocks directly in your brokerage like Questrade or Wealthsimple Trade, but the stock prices typically lag 15 minutes behind the actual market data, which is why I choose financial websites instead.
Step 6: Make Your Trades
Once you’ve established your portfolio strategy and chosen your investments, it’s time to make your trades!
The first thing to note is that you can only make trades during stock market hours. Both the Toronto Stock Exchange and the New York Stock Exchange are open Monday through Friday from 9:30am to 4pm EST and closed for Canadian or US holidays, respectively.
If you are not able to trade during regular market hours, you can always set up trades outside of market hours to be executed when the market opens. This is also a great way to automate your portfolio so you avoid making emotional buy or sell decisions.
Step 7: Optimize Your Portfolio
Once your portfolio is set up and your money is in the market working for you, you need to do some regular maintenance to keep things running smoothly.
Advice for First-Time Canadian Investors
Canada has the strongest banking system in the world, and an equally strong resource market — not to mention some of the best tax breaks the stock investing world has to offer. Here are three ways you can start taking advantage of the Canadian stock market.
Open a Registered Retirement Savings Plan (RRSP).
An RRSP is a tax-sheltered retirement account. It allows you to contribute pre-tax dollars from your paychecks and let them grow tax deferred. That means you won’t pay taxes on investment income inside an RRSP until you withdraw money from your account. The advantage of tax-deferral: by the time you start withdrawing money (ideally in retirement), your income will be smaller, your tax rate lower, and the taxes you pay significantly reduced.
Don’t try to time the market.
Timing the market is an attractive strategy, as it promises immense short-term gains if you sell at the right time. But that’s the problem—knowing when to sell. Nobody knows how stocks will fluctuate, and it’s easy to sell at the wrong time. A safer strategy is to set-it-and-forget-it and build wealth in the long-term.
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Conclusion
How do stocks work in Canada? The short answer is it depends. How are stocks priced in the US? Again, it depends. There are many different ways to value stocks based on assets, earnings, cash flow or what-have-you. Here’s an introduction to the basics of how stock prices are set in Canada. I’m not providing specifics of how to value a stock here. I’m also not talking about an investment strategy that would involve you deciding which companies are worth investing in either. That’s something that’s way beyond this beginner’s guide, but if you’re interested check out the Canadian Couch Potato for his advice on investing strategies and index funds.