Most new investors start out by putting their money in GICs or mutual funds because it’s what someone at their bank recommended. But after a while, some investors want to learn how to invest in stocks.
To start investing in Canada, you’ll need to open a brokerage account. If you have a lot of money, you might go with a regular broker. But most Canadians use an online broker because the fees to buy and sell stocks are a lot lower. You get to choose how to invest in stocks (or American stocks) with an online brokerage account, which is also called a self-directed account.
There are many online brokerages in Canada to choose from, but if you want to learn how to invest in stocks, it’s a good idea to compare your options before diving in.
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Account options for online brokerages
Many brokers will let you open various accounts, such as a tax-free savings account (TFSA), registered retirement savings plans (RRSP), registered education savings plan (RESP), locked-in retirement account (LIRA), life income fund (LIF), registered retirement income fund (RRIF), registered disability savings plan (RDSP), or a non-registered account.
Most online brokers allow you to open one or more of each different type of account depending on your circumstances. For instance, you can open up an RRSP unless you’re older than 71 (in that case you have to get an RRIF). Keep in mind that there are some brokerages that don’t offer every single kind of account. So if you want to have all of your accounts at the same financial institution, you may be out of luck.
Investment options for online brokerages
There are many different types of investments you can hold in an online brokerage. The most common ones are stocks, bonds, exchange-traded funds (ETFs), GICs, mutual funds, and cash.
Most brokerages will only let you buy Canadian and American stocks, but some will allow you to purchase stocks listed on European and Asian exchanges.
How you invest should be based upon your risk tolerance. You can figure this out by filling out an investor questionnaire. It’s important to figure out your risk tolerance in order to find the right mix of investments for you.
There are a number of ways to invest in stocks. You can buy a mutual fund, an ETF, or an individual stock. A mutual fund or an ETF gives you instant diversification because they own a variety of stocks (and possibly bonds). However, you will need to own both a variety and a number of stocks in order to be diversified.
The pros of individual stocks
There are advantages and disadvantages to buying an individual stock. The biggest advantage is that you don’t have to pay an annual management fee like you do when you own a mutual fund or ETF.
Another advantage is you get to decide when you buy or sell the stock and how much of the stock you want to own. In a mutual fund or ETF, the fund manager or the ETF provider makes all the buying, selling, and allocation decisions.
The cons of individual stocks
There are also disadvantages to owning individual stocks. The biggest disadvantage is that it can take time to build a truly diverse portfolio. It’s often recommended that you own at least 20 stocks, with an equal amount allocated to each one. For example, if you own 20 stocks, you should try to allocate no more than 5% to each stock. But you also have to watch what sectors you invest in. If you decide to buy 20 stocks and 10 of them are bank and insurance stocks, you won’t be diversified because half of your stock portfolio will be in financial companies.
While there are no ongoing fees to own stocks—except for account size minimums for some brokerages—there is a cost to buy and sell stocks. These commissions (which are usually between $5 and $10 per trade) can eat into your returns, especially if you’re only investing a small amount. If you have $5,000 to invest and want to buy 20 stocks, it will cost you up to $200, leaving you with as little as $4,800. That’s why many experts recommend that you wait until you have a large sum of money (usually more than $50,000) before investing in individual stocks.
Another disadvantage of buying a stock is the time you need to spend researching what to buy and monitoring your portfolio. You should be looking at the balance sheet, industry trends, and keeping an eye on how they’re performing. You don’t need to set up Google news alerts for every stock you own, but you’ll want to check in every once in a while.
When you buy or sell a stock with an online broker, such as Questrade, you have to pay a commission for every trade you make. However, there are no management fees. (Read our Questrade review for more information.)
No opening or closing fees. Free account transfer. Registered account options available.
When you invest your money with a robo-advisor, such as Wealthsimple, there are no fees for each transaction in a portfolio of ETFs. However, there’s an account management fee based on the size of your portfolio plus the fees on the underlying ETFs. (Read our Wealthsimple review for more information.)
$50 bonus when you open and fund your first Wealthsimple Invest account* (min. $500 initial deposit)
Various investing options and savings accounts available
A less complicated solution
If investing in individual stocks seems too complicated or time-consuming, there are some easier options. For instance, the Canadian Couch Potato blog has a variety of model portfolios of index funds or ETFs that you can buy. However, you may need to rebalance the portfolio at least once a year.
There are also the new all-in-one ETFs from RBC iShares, BMO, and Vanguard that invest in a mix of stocks and bonds, and do the rebalancing for you. All you need to do is buy just one of those ETFs in an online brokerage account. Not only will the overall cost will be much lower than using a robo-advisor, but it will also be a lot easier than investing in a basket of stocks yourself.