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How to Buy Stock in Canada: 6 Essential Tips for Beginners

It might be overwhelming to learn how to buy stock in Canada, but this article will teach you how to conduct stock research, pick online brokers, and manage your investment account in the Canadian stock market.

Nowadays, buying stocks is easier than ever, thanks to self-directed online brokerage accounts and investment applications. But before you begin, it’s crucial to become familiar with specific basic terminology that aids in your investigation of suitable trading stocks.

Read this article if you are thinking of buying stocks in Canada.

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1) What is Stock?

A stock is a representation of a company’s shares. As a result, you have a financial stake in the business’s achievement and loss; you share in its rewards and suffer losses when it fails.

2) Types of Stocks

There are two primary categories of stocks:

2.1) Common Shares

Investors typically hold stock and purchase these kinds of stocks. When you buy a common share, you get a piece of the business. You now can cast a ballot on corporate affairs, including the choice of the board of directors.

You have a claim on the company’s resources and earnings, in addition to being a shareholder. (dividends). The payment of bondholders, preferred shareholders, and other creditors come first if the business experiences financial difficulties. So, dividends are not guaranteed.

2.2) Preferred Shares

In addition to receiving a predetermined dividend payment per share, preferred shareholders possess shares and have a higher claim to assets and income.

Because preferred shares have traits with stocks and bonds, they are also known as hybrid instruments. Perpetual, retractable/convertible, rate reset, and adjustable rate preferred shares are some examples of this kind of securities.

3) How to Buy Stocks in Canada?

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These are some steps that a beginner can follow if he/she thinking to buy stocks in Canada.

3.1) Open an Online Brokerage Account

You’ll need a brokerage account to begin investing in stocks. You may create a brokerage account online if you’re a self-directed investor and trade stocks yourself. There may be fees to maintain the account or execute trades, this is sometimes the most affordable option to begin investing and trading stocks yourself.

You may purchase and sell stocks through your online brokerages, brokers, or financial advisers if you’d use their knowledge of investing in the stock market. However, this option will cost you more money.

The most often used investment accounts are:

3.1.1) Registered Retirement Savings Plan

RRSPs are frequently utilized for retirement savings. When you contribute to an RRSP, you can access the money later in life when you may be in a lower tax band and avoid paying taxes on the profits you receive on the assets in the plan.

3.1.2) Tax-Free Savings Account

You may use a TFSA to save money since it allows your money to grow tax-free for both short- and long-term goals. The tax-free savings account (TFSA) is a way to invest for various objectives, such as a forthcoming trip or a sizable purchase.

3.1.3) Margin Accounts

By exploiting the wealth in your portfolio, margin accounts1 can increase your purchasing power. To make further investments and access advanced investment methods, such as option trades2 and short selling, you can borrow against the value of the assets you currently hold.

Conversely, not everyone should engage in leveraged transactions. Increased exposure and risk go hand in hand with the possibility of higher profits.

3.1.4) Cash Account

You may trade several assets on North American markets and utilize a cash account to save for various objectives. It also allows you the convenience of quick access to the available funds in the investing account.

3.1.5) Registered Education Savings Plan (RESP)

RESP, This investment account is used to put money aside for a child’s post-secondary education. The government also contributes up to $7,200 in free grant money with your payments.

You can also open a non-registered account to invest in equities for either personal or professional usage.

3.2) Learn About the Canadian Stock Exchanges

In Canada, the stock may be purchased and sold on the following exchanges:

3.3) Get Ready to Read the Stock Charts

It’s a good idea to learn how to keep track of your finances whether or not you utilize an advisor. You must comprehend stock charts, sometimes referred to as stock tables, to be able to read them effectively.

3.3.1) Bid/Ask and Spread/Size

The money buyers are prepared to pay (the bid), and the sellers accept (the ask) determines the stock price. it is similar to any market driven by supply and demand,

Between the ask and the bid, there is a price difference known as the spread.
Stocks with more trading volume frequently have a smaller spread, indicating greater liquidity. (or easier to buy and sell).

3.3.2) Change

The stock’s value has changed significantly since the previous day’s closing price, as shown by this phrase. A change in the stock price can be expressed mathematically or as a percentage change.

3.3.3) Volume

Volume refers to the number of shares exchanged over a specific time frame. That stock is being bought and sold by more people, as evidenced by a higher volume.

3.3.4) 52 Weeks of Highs and Lows

The highest and lowest stock prices during the previous year are the highs and lows.

These figures, together with the difference between them, can be used to gauge the overall volatility of the stock.

3.3.5) Ticker symbol

A corporate name, ticker, or stock symbol abbreviation is typically two to five characters long. A public corporation is shown in this format on stock markets.

3.4) Investigate Any Potential Investments in Stocks in Canada

It’s crucial to read the financials of the companies you wish to invest in after setting up your brokerage account and being comfortable with stock trading jargon.

These terms will help you in your research:

3.4.1) Earnings per share (EPS)

After a company’s expenses are covered, the remaining funds are known as earnings. To calculate EPS, divide this amount by the total number of shares.

However, a corporation may artificially inflate this number if it purchases its stock. Hence, lowering the total number of shares available.

3.4.2) Dividend Yield

The yearly dividend payment of a corporation divided by its current stock price is represented by this ratio, which is stated as a percentage. However, the dividend yield will rise if the present stock price drops. A greater dividend yield is typically a sign of more robust profitability.

Before you begin, you might also want to engage in some “paper trading” by building a fictitious portfolio of various stocks and monitoring its performance on paper (or on a spreadsheet or an online trading simulator) to gain a better understanding of how the stock market operates before you start risking real money.

3.4.3) Price/Earnings Ratio (P/E)

In terms of valuing companies compared to one another, this is the amount that investors are prepared to pay for every dollar of profits.

It may be calculated by dividing the stock price by the annualized earnings per share. For perspective, as of June 30, 2022, the P/E ratio of the Toronto Stock Exchange (TSX) was 14.5.

These were the Stock Market terminology that is very important to know before you start investing in the Stock market.

3.5) Select the Stock Order Type

The market, limit, and stop orders are the three primary categories of stock orders.

3.5.1) Market order

When you place a market order, you express your willingness to buy or sell stocks at whatever price the market will bear at the time. Your sale will close quickly because of this versatility.

If the stock is volatile, your order can cost you more or less than the specified market price at the time it was placed since it might be processed in batches at different prices. Instance

500 shares of a security are purchased using a market order. 400 shares are posted with an asking price of $3, which you purchase, and the best ask is $4.50, which you must pay to purchase the final 100 shares.

Additionally, if you order after the market has closed, it will be completed the next day when it reopens, maybe at a different price.

3.5.2) Limit order

With a limit order, specify the highest price you are ready to pay for a stock and the lowest price you’ll take if you decide to sell it. The limit order is placed and remains on the exchange until it is filled, expires, or is cancelled.

Your order could take longer to fill (than a market order), or it might not happen if the shares don’t trade at the price specified in your limit order. Instance

If a stock is now going for $5, you want to purchase it but don’t want to spend more than $4.50 a share.
You put a limit order at $4.50 for 300 shares. Your order will either be fully or partially completed if there are enough shares with an ask of $4.50 or less available, depending on how much the stock price drops.

3.5.3) Stop order

Stop orders, which are not made public to the market, let you specify the precise price at which you’re ready to purchase or sell shares.

U.S. exchanges accept limits and stop orders, but Canadian markets only permit limit orders. Instance

You presently hold 100 shares of a stock with a $5 market value. You wish to reduce your losses because you anticipate that its value may decline.

Instead, you may put a stop-limit order with the first limit price being set at $3 and the stop at $4.50. A limit order is put in place to sell your 100 shares at $4.50, but not at a price lower than $3.

3.6) Over Time, Improve Your Investment Portfolio

Even if you are a seasoned investor and businessman, picking winners and timing the market accurately 100% of the time is difficult. You must be willing to put up with short-term changes if you think the business you’re investing in will be reliable in the long run.

Investment diversification is the best approach to maximizing your wealth. Over time, choosing companies from various businesses and sectors will balance out the performance of growth stock in your portfolio.

Investing in exchange-traded funds or mutual funds is another option to diversify your holdings and acquire access to the stock market without having to do exhaustive business research. These resemble miniature stock and investment portfolios.

The fractional ownership of equities that would otherwise be prohibitively expensive is also possible through ETFs and mutual funds.

You can purchase shares of an ETF that contains that particular stock in its portfolio if a stock is worth $1,000 per share, but you don’t want to spend that much money on one stock.

4) How Do I Buy Stocks Online in Canada?

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The online brokerage services that provide stock trading in Canada are covered here.

4.1) Questrade

Since 1999, Questrade has provided online broker services and investment advice to Canadians. In addition to other financial products, it provides low-cost trading in stocks, ETFs, options, and forex.

For investors and active traders who want a personalized platform, access to cutting-edge market data, and charting tools, Questrade is a fantastic option. The best cheap brokerage in Canada overall is this one.

4.2) Wealthsimple Trade Stocks in Canada

The best commission-free stock trading platform in Canada is Wealthsimple Trade. It works well for novice stock traders.

Investors using Wealthsimple to purchase or sell hundreds of individual stocks, or ETFs do not pay trading charges, in contrast to the $9.95 per deal paid by major bank discount brokerages.

Additionally, this site provides fractional share trading, allowing you to purchase small amounts of pricey equities like Apple, Tesla, and Amazon.

4.3) Qtrade

Stocks, ETFs, GICs, options, new issues (IPOs), mutual funds, and bonds can all be traded on the independent brokerage platform Qtrade.

Over 100 commission-free trading ETFs are available.

5) Canadian Big Bank Stock Trading Platforms

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The largest banks in Canada all provide self-directed investors with access to stock trading platforms.

Although their prices are higher, a regular trader could be entitled to discounts. You might also need to keep your account balance at a minimum to avoid incurring inactivity fees. One can invest in the TSX using any of these platforms.

5.1) TD Direct Investing

A pioneer among Canadian stock trading systems, TD Direct Investing is the brokerage arm and investment strategy of TD Bank.

IPOs, mutual funds, ETFs, options, bonds, and other financial instruments can all be traded through this online broker.

5.2) RBC Direct Investing

The brokerage arm of the Royal Bank of Canada is known as RBC Direct Investing. (RBC). The trading platform lets you trade bonds, equities, ETFs, mutual funds, and options. A sample practice account is also available.

5.3) CIBC Investor’s Edge

The Canadian Imperial Bank of Commerce’s online brokerage and platform is the CIBC Investor’s Edge. (CIBC). This online brokerage could be right for you if you want to use a bank-owned stock trading platform.

You may trade stocks, ETFs, options, mutual funds, GICs, and more using this platform, which has very affordable pricing.

5.4) BMO Investor Line

The Bank of Montreal is the company that runs this trading platform. (BMO). Rookie and experienced traders can use it to trade stocks, ETFs, mutual funds, options, GICs, bonds, and more.

6) Taxes and Investment Returns on Stocks

The dividend payout ratio and dividend yield are two performance metrics that investors use to judge a company’s strength and the value of its shares.

The dividend yield contrasts the dividend’s percentage of the stock’s current price with the dividend payout ratio, which reveals how much of the business’s profits are paid out as dividends to shareholders.

The frequency of dividend payments might be monthly, quarterly, semi-annually, or annually. Additionally, a business may opt not to distribute dividends if having financial difficulties or prefers to spend revenues on expanding.

Selling or buying stocks at a profit might help a shareholder profit from the stock market. If the situation is the opposite, you sell stocks, you sustain a capital loss.

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Your stocks will be taxed as follows if they are kept in non-registered accounts:

6.1) Capital Gains

Any capital gains are subject to a 50% tax in Canada. If you sell your investments for more money than you purchased for them (realized capital gain), you must include 50% of that profit in your income.

This implies that the actual amount of extra tax you pay will vary based on your income level and other sources.

6.2) Dividends

In Canada, you do not have to pay taxes on income generated if you invest in stocks in a registered account, such as an RRSP or RESP until you take money out of the investment account. No taxes are owed on income received in a TFSA.

7) Advantages of Investing in Stocks in Canada

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When investing in stocks, you have two choices: you may purchase individual shares or a pool of shares held by an equity mutual fund or exchange-traded fund (ETF). Investing in shares has certain benefits, including:

7.1) Political Stability

Canada is the only G7 nation to grant preferential access to more than 50 international markets. It is appealing to conduct business in Canada due to its friendly business environment and competitive corporation tax rate.

7.2) Sound Banking System

In terms of corporate services, manufacturing, R&D, and digital, Canada is the country with the lowest business expenses. Canada pride itself on having progressive public policies that promote business development, economic expansion, talent recruitment, and the advancement of science and technology.

7.3) Low Corruption

On the Corruption Perceptions Index 2021, Canada is ranked third among the G7 nations and thirteenth overall.

7.4) Reduced Expenses and Risk

The marginal effective tax rate (METR) for Canada is now the lowest in the G7 and is lower than the OECD average at 13.8%.

7.5) Favourable Taxation

Capital gains are only taxed on 50% of them. Dividends also receive a more favourable tax treatment than interest income (from bonds and GICs), which is subject to a full 100% tax at the investor’s marginal tax rate.

7.6) Outperform Inflation

Stock gains over the long run often exceed inflation. As a result, the stock investment gives you the chance to diversify your holdings and generate real income.

7.7) Protection

An investor protection fund may be able to compensate investors for losses brought on by an insolvent investment dealer or mutual fund dealer.

The CIPF creates a new organization that is separate from the New SRO by combining the previous Canadian Investor Protection Fund with the MFDA Investor Protection Corporation. In the case of a company’s bankruptcy, the CIPF pays qualified clients of New SRO member companies compensation.

8) The Drawbacks of Stock Market Investing

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Everything has its benefits and drawbacks. Here are some drawbacks to stock market investment.

8.1) Volatility

When it comes to news, rumours, investor mood, and business information, the stock market may be a bit erratic. Stock prices can remain low during economic downturns for a long time.

8.2) Total Loss Risk

After bondholders and preferred shareholders have been compensated, a corporation might declare bankruptcy and leave nothing for regular stockholders.

Companies may experience financial difficulties and be unable to pay dividends due to underwhelming revenues or expenses. An Investor has to possess risk tolerance while investing in stocks.

8.3) It Takes Time

Buying stocks of individual stocks and companies, assessing each one for its merits, and making sure your “basket” of equities is sufficiently diversified can take time.

Financial ratios like EPS, P/E, and ROE, as well as an understanding of financial statements, are all essential knowledge for investors to have to succeed.

9) Frequently Asked Questions

Some Frequently asked questions related to stocks in Canada. Some of them are listed below.

9.1) How Can I Purchase Stocks Devoid of a Broker?

One Can go for Direct stock purchase plans (DSPPs) and dividend reinvestment plans (DRIPs) are ways for investors to buy dividend stocks directly from the corporations that provide them.

9.2) How Much Money Will I Need to Buy Stocks?

You may start stock investing with just $1. Some trading firms have an entry-level portfolio threshold (for instance, $1,000) and may charge an ongoing or dormancy fee if your account’s total balance is between $5,000 and $25,000 or less.

9.3) Is It Possible to Buy Stocks Online for Nothing in Canada?

Wealthsimple Stock Trade is now Canada’s free stock trading site. The website allows the free purchase of thousands of equities listed on Canadian and American stock exchanges.

10) Bottom Line

Regardless of what you choose, financial experts concur that the best chances of making money are for those who have the patience to keep a broadly diversified portfolio of assets for a long time, perhaps 20 years.

Don’t let your fear of stock purchases keep you from reaping the rewards of investing.

We anticipate that the details provided will help you understand how to buy stock in Canada.

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