All You Need To Know About Trading Stocks in Canada

Trading stocks can be very lucrative, which is why many people get involved in it. If you're thinking about joining the ranks of active traders in Canada, there are some things you should know first. For one, you need to pick an investment approach, choose a broker, and research stock prices.

Depending on the circumstances, you can buy and sell stocks via an (online) broker or on your own. If you are new to stock trading and would prefer some assistance, you can open an online brokerage account with a proven beginner-friendly stock brokerage.

However, if you prefer trading on your own, research companies that offer stock purchases without a broker through their dividend reinvestment program.

You also need to know that the stock market is volatile, and you can gain or lose a lot of money, especially when you just start investing. Thus, evaluating how much money you can afford to invest and whether to seek investment advice will be essential.

Now, let's get to the specifics.

Qualities Stock Investors Should Have

You should invest in stocks if you:

• Can afford to wait at least several years for your investments to pay off.
• Are aware of the risks stock investment involves.
• Are comfortable with individual stocks losing value in the short term.
• Have an emergency fund to cover unexpected expenses, so you won't have to sell shares for that.
• Don't need immediate investment income and can ride out temporary downturns in the market.
• Have relevant online brokerage and trading platform knowledge, understand how a direct purchase and evaluation work, and how much time investments need to compound, among other things.

Getting Into the Stock Market

The first step is assessing your financial resources and short-, middle-, and long-term life goals. If you have enough funds for short- and middle-term goals (up to several years), you can use the remaining money to buy stocks.

You can make a purchase with as little as $100, but investing at least $1,000 would be a good start. Of course, more is always better.

Let's get to the action part now.

1. Opening an Online Brokerage Account

Look up brokerage firms and independent online brokers to figure out what suits your needs better. Some key factors to consider are trading fees and commissions. Self-directed investors may find brokerages owned by big banks more convenient, but discount brokers are typically more affordable.

Of the latter, you should consider opening an account with Questrade or Wealthsimple. Questrade is among the fastest-growing brokerages in Canada, while Wealthsimple offers commission-free trading. What's more, both offer highly rated stock-trading apps for seamless price evaluation and exchange.

2. Opening an Investment Account

Upon choosing a brokerage firm, opening a tax-sheltered savings account is another step. Many investors open Registered Retirement Savings Plan (RRSP) accounts or Tax-Free Savings Accounts (TFSA). While the former favours high-income traders, the latter benefits small investors. However, if you can afford to open both, even better.

Note that an RRSP incurs taxes on withdrawals in retirement while providing tax deductions on contributions. A TFSA doesn't offer such a benefit but allows you to withdraw money tax-free whenever you wish. You can also consider opening a nonregistered account, but maximizing the registered account contributions first is typically a better solution. 

3. Funding the Chosen Account

Once you make the initial deposit, consider activating a biweekly or monthly automatic fund withdrawal to the investment account. It helps you build up your investment portfolio and have money on hand if a stock reaches its limit price, requiring a quick reaction on your part.

4. Choosing Stock Types To Trade

The three types of stocks you can choose are:

Exchange Traded Funds

ETFs are passive investment funds that track a basket of assets mirroring an index. Some of the most popular ETFs in Canada are:

• Vanguard Growth ETF Portfolio
• Vanguard Balanced ETF Portfolio
• BMO Canadian Dividend ETF

In general, ETFs allow you to benefit from price transparency. Plus, ETFs are more affordable than mutual funds.

Some drawbacks of are the ease of trading, which lures investors into over-trading, and an overabundance of ETF types, which makes choosing a particular ETF to invest in a little bit difficult.

Common Stocks

Buying common stocks (shares) of a public company makes you a proportional owner. You're then entitled to a percentage of the company's growth from a rise in the stock’s price, share splits, dividends, new shares from spin-offs, or a merger. You also get voting rights on company matters.

The biggest pros here are the control of the investment and earnings from the company's growth. On the flip side, diversifying your portfolio this way takes a lot of time, and purchasing individual stocks exposes you to significant losses if the company’s stock price declines.

Mutual Funds

Mutual funds are investment pools comprising funds from a group gathering many investors. They are free to trade in an S&P/TSX Composite or other broad stock market indexes.

Portfolio managers aiming to provide an above-average return manage most mutual funds.

The main benefits of trading in mutual funds are returns exceeding the general stock benchmark. The most significant drawbacks are higher fees than most ETFs feature, extreme risk due to being managed by a single person, and less tax efficiency than common stocks and ETFs provide.

5. Choosing an Investment Approach

Many factors affect this decision, including your short- and long-term financial goals and investment horizon.

This is a crucial step because you will make emotional decisions if you don't have an investing plan, which can lead to poor choices and significant losses. Thus, don't rush to decide on the right investing approach.

The most common approaches are:

Index (Passive) Investing

Most beginners  consider this approach first, because indexing is the easiest strategy overall. If you opt for this approach, you'll trade in ETFs or mutual funds linked to a broad stock market index, such as the S&P 500 or TSX Composite Index.

Plus, you can construct a diversified portfolio with index investing by using only one to four ETFs that cover the Canadian, US, and international stock markets, besides corporate or government bonds.

Note that this type of investment eliminates the possibility of human error caused by emotional trading. Thus, it's pretty stress-free. However, some might find it boring since it follows the market and doesn’t bring huge returns.

Investing in Dividends

This approach is a popular investment strategy offering a passive income. In general, dividend stocks tend to perform better than average over time.

Dividend investing offers stability and regular cash flow, which can be helpful during challenging times in the market.

Some key advantages of investing in dividends are:

• Money keeps arriving every month or quarter.
• It allows traders to remain in the market for a long time.
• Dividends ensure income even during market disturbances.

The most significant drawbacks are:

• Stocks boasting high dividend yields are hazardous.
• Dividend stocks are less diversified than they should be.
• Poor diversification leads to poorer outcomes than with ETFs or market-tracking index funds.

Growth Investing

An investment strategy focused on growth stocks is the best approach for investors who don't need immediate cash flow and are okay with a higher level of risk, since the prices for these securities fluctuate constantly.

Growth stocks don't pay dividends until they mature but have the potential to offer capital gains, which aren’t taxed as much as regular income.

However, investing in growth stocks is riskier than other strategies. Still, many people with investment accounts find themselves drawn to Amazon, Facebook, and Netflix and famous story stocks in general, as they are basing their strategy on a company’s reputation rather than actual performance.

6. Stocks and ETFs Research

You can do this with an account at most online brokerages. Moreover, you can facilitate your search via specialized websites for stock research.

If you don't know where to start, researching renowned companies whose products are popular among consumers would be a good idea. Next, scan the information available in a given stock’s summary, as it contains data relating to its 52-week range, dividends, and more.

The crucial things to consider before are:

• Performance: This parameter shows you how the stock performed in the past.
• Stock price: Stock prices fluctuate constantly, and tracking them helps you determine whether the current price for a security you want to purchase is low or high compared to its past performance.
• Market and industry trends: Evaluating how the industry is likely to perform in the future is crucial to deciding whether you should buy a particular stock and whether the company it’s from will be able to grow, considering market volatility.
• Dividends: This particular parameter is essential to prospective dividend investors figuring out how to buy a share since it reveals whether the stock pays dividends, if the dividend is sustainable, and if there's a potential of it being cut sometime in the future.
• Future projections: This variable indicates how the stock should perform in the future and whether its value is expected to increase or decrease.

7. Trading Stocks

You can trade from 9:30 a.m. to 4 p.m. ET on the Toronto Stock Exchange and New York Stock Exchange. The Toronto Stock Exchange is the third-largest in North America by market capitalization, while the New York Stock Exchange is the largest globally.

If you aren't able to trade stocks during market hours, most online brokers will let you set up trades for execution when the market opens. You can easily use your online brokerage account to set up a market order or an order to buy stocks as soon as a given security reaches its limit price (i.e., make a limit order).

You can use a full-service broker or purchase securities directly from a company through its direct stock purchase plan. Direct stock purchase plans are companies' investment strategies that allow individual traders and investors to buy stocks from them or their transfer agents.

How To Buy US Stocks in Canada

To start trading US stocks in Canada, you’ll first need to choose a Canadian brokerage offering stocks by US companies.

Buying US stocks brings various benefits, because the Canadian market is smaller than the US’s.

Pros and Cons

Finally, let's briefly sum up all the pros and cons covered in our article:

Benefits

The most significant advantages are:

• Returns outperform inflation: Stock investments allow you to grow your portfolio and generate long-term returns that usually outperform inflation.
• Convenience: Online brokerages make buying stocks easier than ever as you can do it from any location using your laptop or mobile phone.
• Capital gains: One of the main reasons to start trading stocks is that they may appreciate, thus bringing you capital gains.
• Diversification: ETFs and mutual funds allow you to diversify your portfolio in various markets across industries and countries, which is crucial for lowering risk.
• Dividends: Companies often share a portion of their profits with shareholders via dividends, so you become eligible to receive these payments when becoming a shareholder. Moreover, dividends are preferentially taxed compared to interest income from GICs and bonds.

Drawbacks

The potential disadvantages here are:

• Potential significant losses: Companies can go bankrupt and leave common shareholders without funds once preferred shareholders and bondholders receive their payments.
• Market volatility: Stocks are subject to market volatility, which means their prices may go up and down rapidly; this aspect makes it risky to buy stocks, especially for those with a low risk tolerance.
• Stock evaluation: Evaluating and buying stocks takes a lot of time and effort as you need to research companies, read their financial statements, and analyze the markets, and even then, you might make the wrong choice.