Investing in Stocks: your Guide to Canadian Investments

Investing in stocks can be a great method for Canadians to grow their wealth.

Building a great investment portfolio can go a long way to helping Canadians achieve a state of financial wellness. 

But for some, it’s easier said than done 

Understanding the Canadian investing landscape can be challenging, and it may feel like a full-time job just to stay on top of the financial trends. Investment vehicles like stocks, bonds, ETFs, Mutual Funds, REIT’s, and Cryptocurrencies can sometimes overcomplicate what is a very simple process. 

If you want to be a day trader, you’ll need an in-depth knowledge of these terms, but for those who are looking to steadily build wealth, and live a rich life, you only need to know where the building blocks need to go, not how the building is made. 

In this post, we’ll talk about one of the most popular investment options for Canadians……Stocks. 

Googling “what is a stock?” will lead you down a personal finance rabbit hole that can be frustrating, and may result in you ditching the entire learning experience altogether. I’ve pulled a few highlights from what I consider to be great source material to help provide the benefits and the drawbacks of bonds

Terms You Need to Know: 

Bull Market: A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities (Investopedia)

Bear Market: A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment (Investopedia.com).

Dividends: Some companies offer dividends, a kind of profit-sharing program for investors. Investors receive a specific dollar figure on a quarterly basis that has no direct relationship to the stock price. (Though a company board may decide to increase or decrease future dividends it pays based on its financial health.) Researching dividend programs can be super valuable because in some cases, the dividends a company throws off can equal as much or more than one might expect to earn from a savings account. (Of course, unlike bank accounts and interest, stocks can fall and dividend programs can go away altogether.) Tracking if companies have consistently provided dividends, or even raised them, is one indication of a company’s health and possible future stock performance (wealthsimple).

Read: Complete Guide to TFSA’s

Read: Complete Guide to RRSP’s

Stay up to Date on the Latest Travel Deals

Here are 7 things you need to know about Stocks in Canada

1. Investing in Stocks – What is a Stock? 

You’ve probably heard a lot about stocks. 

Stocks are a form of security that provides with the holder with ownership of the issues company. Corporations sell stocks to raise money for their business. 

Stocks are one of the best ways to generate wealth here in Canada. There are plenty of growing organizations around the world, and buying a share of that company allows you to get in on the action. 

To buy a share of a company, they first must be publicly traded. A simple Google search can determine whether or not a company is publicly traded. 

Stocks are traded on a stock exchange. In North America, the primary stock exchanges are the New York Stock Exchange (NYSE), and the Toronto Stock Exchange (TSX).

The price of a stock is determined by simple supply & demand principles. There are only a finite amount of shares that an organization can/will issue. If the shares are in high demand (Amazon for example) the price per share will be high. Adversely, there are many companies out there with extremely cheap shares. 

Over time, you will see the share prices go up and down, for reasons that are unforeseen and in most cases out of your control. As a result, building wealth through stocks requires the right balance of risk & rewards. 

2. How to Make Money By Investing in Stocks

At a high level, you make money investing in stocks by buying a stock at a certain price, having that stock price rise, and then proceeding to sell it at a higher value. 

If you buy one share at $10 and sell it at $20, you’ve doubled your money. 

Unfortunately, knowing which stocks are going to skyrocket it value can be very difficult, and even those who are managing money professionally fail to beat the index (the rate at which the market increases). It would be great to pick out the next Tesla, but there is no magic pill for that. 

You can also make money by having your shares pay a dividend, which we’ll cover below. 

3. How to Buy Stocks

If you want to buy stocks, you’ll need to do it through a broker. There is no way around it. There are several brokers in the market, which is a good thing for Canadians. 

If you currently do not have any personal investments, there are several trading platforms in the market that are easy to use. 

Option #1 – Use a Trading Platform and Do It Yourself

If you’d prefer to buy your stocks, the platforms listed below will allow you to buy and sell the stocks of your choosing.

Here are 5 of the top trading platforms in the market according to stockbrokers.com

Online Broker	Best For	Commission	Overall Rating
Questrade	Best Overall	$.01 per share	4.5 Stars
Qtrade Investor	Best for Research	$8.75	4.5 Stars
Interactive Brokers	Best for Professionals	$.005 per share	4 Stars
TD Direct Investing	Diverse Trading Tools	$9.99	4 Stars
CIBC Investor’s Edge	Transparent Fees	$6.95	4 Stars

Option #2 – Outsource

If you’d prefer to have someone else purchase the stocks on your behalf, you can do that as well

In Canada, outsourcing your investments usually comes down to two choices: a traditional financial institution, or a robo-advisor. 

What is a Robo-Advisor? 

A robo-advisor is a service that uses computer algorithms to build and manage your investment portfolio. You set the parameters, such as time horizon and how much risk you’ll accept from them; then let these models do all of the hard work for you.

Robo-advisors are a great low-cost alternative to traditional investment management services.

Robo-advisors can automate investing strategies that optimize the ideal asset class weights in a portfolio for a given risk preference. Some traditional advisors are now offering robo-advisors-as-a-service as part of the portfolio construction and investment monitoring side of a more holistic financial planning practice

Robo-advisor is best for the following individuals:

• Those who are technologically savvy 
• Those looking to save on investment fees 
• Entry level investors
• Those who use a traditional financial advisor, but do not engage with them on a regular basis

Robo-Advisor vs Traditional Financial Advisors

Benefits of Financial Advisors	Benefits of Robo-Advisors
The human element means you can call someone in case you have a question. The importance of technology is somewhat lessened.	The fees are much lower than traditional advisors, and the ease of opening a portfolio cannot be stressed enough.
The consumer-facing platforms are much easier to use compared to their traditional counterparts.	The technology behind the algorithms eliminates the human error aspect of investing. Remember, 50% of financial advisors are below the median. Knowing that your money is being managed by a best in class algorithm compared to a human, instills a “set it and forget it” mentality (which is a good thing when talking about retirement planning)..
Most financial advisors can answer questions about topics that go beyond investment & retirement portfolios (life insurance, annuities, etc)	The consumer facing platforms are much easier to use compared to their traditional counterparts.

Robo-Advisor Options in Canada

If you have questions about robo-advisors, or if you feel you may benefit by switching to a technology-based solution, I strongly encourage you to check out Wealthsimple. 

It won’t take much research to conclude that Wealthsimple is Canada’s top robo-advisor, a product I use personally. Wealthsimple is a robo-advisor, but still provides clients with access to human advisors to answer their questions (a best-of-both-worlds situation). Wealthsimple offers an easy-to-use platform and does not require a minimum investment to get started. 

Here is a detailed review of the user experience by Canadian Youtuber Brandon Beavis 

Bottom line…….check out Wealthsimple 

4. Choosing the Right Investment Account 

After deciding if you’d like to go the traditional or the Robo-Advior route, you must choose the right Investment Account. 

In Canada, the two most popular investment accounts are a Registered Retirement Savings Plan (RRSP), and a Tax-Free Savings Account (TFSA). 

Which one is right for you? 

Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) have several similarities, but there are differences as well.

TFSA’s and RRSP’s both have contribution limits. Your RRSP contribution limit is tied to your annual income. The contribution limit for a TFSA however, is decided by the GOC annually.

Both the TFSA and the RRSP allow you to grow your money in the account tax-free. However, with an RRSP you will be taxed when you withdraw your funds. With a TFSA, you will NOT be taxed.

Feature	RRSP	TFSA
Contribution Limit	Yes	Yes
Money Grows Tax Free	Yes	Yes
Money is Taxed at Withdrawal	Yes	No

Here are some other factors to consider per wealthsimple.com:

• If you haven’t contributed much towards your retirement and you happen to have access to a pile of money right now through, say, a bonus, or inheritance, a TFSA might be the best option for you, since RRSPs have what’s called an annual deduction limit, meaning that you won’t be able to deduct over a certain amount in any given year. The number for 2020 is $27,230 but you can find past, current, and future deduction limits on this CRA page.
• TFSA are designed to be easily accessed before retirement if the funds are needed—which is good, especially for those with a more immediate goal in mind like buying a house or car. TFSAs are less good if you happen to be the type who’s never been able to resist smashing a piggy bank.
• If the funds are for your retirement, for tax reasons, TFSAs are generally considered preferable to RRSPs for those earning less than $50,000 a year.

Once you’ve reached your contribution maximum for both the RRSP & TFSA, you can still invest within a regular brokerage account, but those gains will be subject to a capital gains tax. 

You can also invest in a tax-sheltered Registers Education Savings Plan (RESP), but earnings from that account must be directed towards post-secondary education for you or your dependents. 

Read: The Complete Guide to RESP’s

5. You Can Buy Individual or Bundles of Stocks 

When investing in stocks, you can choose to buy shares of individual publicly traded companies (Tesla for example), but you can also choose to buy a bundle of stocks. 

Some of these bundles are actively managed by a human “fund manager.” These are called mutual funds.

Some of these bundles are passively managed by computer algorithms. These are called ETFs

Should I Invest in Mutual Funds or ETFs?

Mutual Funds & ETFs are similar in the fact that they are alternatives to going out and picking stocks/bonds individually. 

There are both a pre-packaged bundle of assets.

But there are some big differences. As mentioned above, ETFs are passively managed, meaning their job is to track an index and grow at the pace of the market. ETFs are low-risk, and a lot more predictable. Since they are managed by computer algorithms, they are cheap as well (0.25% Managed Expense Ratio on average). 

Mutual Funds have human fund managers that are trying to beat the benchmark. There is a lot more upside with mutual funds, but also an inherent risk if the fund manager underperforms. Fees are also higher with Mutual Funds to cover the cost of human salaries (2.5% Managed Expense Ratio on average). 

Mutual & ETFs are both fantastic products, and you wouldn’t be wrong in choosing one over the other. Should you want to take on more of the investment responsibilities yourself, you can lean towards ETFs since the fees are low. 

If you are comfortable outsourcing most of the investment process, Mutual Funds could be a better option. If you walk into a bank, they will likely hook you up with a financial manager, and a bunch of mutual funds. This route will most likely have the highest fee rate.

If you select to go to with a Robo-Advisor like Wealthsimple, they will automate the amount of Mutual Funds and ETFs based on your risk profile. 

6. Investing in Stocks Can Pay Dividends

Some stocks pay a dividend to their shareholders, which can further increase your rate of return. 

What is a Dividend? 

A dividend is The distribution of a company’s earnings to its shareholders. The eligibility for this type of financial payout typically depends on the shareholder having owned stock before an ex-dividend date, but it can also happen if someone purchases new shares during that period.

Here is a list of companies that pay out dividends (2021). 

Stock	Ticker	Dividend Paid
AbbVie	ABBV	6.74%
AT&T	T	5.98%
ExxonMobil	XOM	5.14%
Leggett & Platt	LEG	4.25%
Cardinal Health	CAH	4.54%
Chevron	CVX	4.04%
Franklin Resources	BEN	3.85%
Archer-Daniels-Midland	ADM	3.81%
3M	MMM	3.63%
Wallgreens Boots Alliance	WBA	3.49%
Consolidated Edison	ED	3.44%
Genuine Parts	GPC	3.43%
Emerson Electric	EMR	3.43%
Nucor	NUE	3.30%
Federal Realty Investment Trust	FRT	3.15%
Target	TGT	3.13%
Coca-Cola	KO	3.02%
Kimberly-Clark	KMB	3.01%
PepsiCo	PEP	2.96%
Johnson & Johnson	JNJ	2.92%
T Rowe Price	TROW	2.89%
Illinois Tool Works	ITW	2.73%
Clorox	CLX	2.70%
Procter & Gamble	PG	2.58%
VF Corp	VFC	2.57%

While getting a dividend shouldn’t be the first thing you look for when choosing the right stock, ETF, or Mutual Fund (performance is always king), it can serve as a great bonus for your portfolio. 

If you are investing in a Robo-Advisor like Wealthsimple, dividends are added to your overall account balance. 

7. When to Start Investing in Stocks?

The thought of investing in stocks and growing your wealth is exciting, but it’s important to understand if you’re at a point in your life where investing makes sense financially. 

For most Canadians, the biggest thing that should prevent you from investing is high-interest debt. 

Since you can expect to earn on average 5-8% back in returns from the market, any debt where the interest rate is at or higher than that amount should be given financial priority. 

For example, if you are paying a monthly montage at 2.5% interest, you should still be investing, rather than diverting all excess funds toward paying off your house 

However, if you have credit card debt incurring interest at a 19.99% interest rate, your #1 priority should be paying this off. 

Getting out of high-interest debt should be first and foremost when looking at building wealth. The market will still be there once the debt is paid off.

Once that step is complete, you can start building out your portfolio

Read: How to get out of debt

Conclusion 

For those looking to build wealth investing in stocks will help take your hard-earned money, and grow it over time. 

By leveraging Canada’s tax-sheltered savings accounts (RRSP, TFSA, RESP), and by taking advantage of easy-to-use platforms like Wealthsimple, you will be able to easily enter the market, while keeping taxes/fees to a minimum. 

Investing in Stocks – FAQ

What Percentage of My Portfolio Should be Stocks?

This is why I love Robo-Advisors like Wealthsimple. They will automate your investments based on your risk profile. If you have a lower risk tolerance, they will skew your investments more towards bonds.

It’s an extremely easy way to ensure your investment strategy is appropriate, while also saving on fees. Robo-Advisors can also adjust the percentage of your portfolio invested in bonds over time. 

If you’d prefer more of an active approach to investing, there are some rules of thumb you should follow:

A) Have a more conservative approach to investing (up 30% stocks) if you have an investing horizon of <3 years 

• Vacation
• Car 
• Life Events (baby, wedding)

B) Have a more moderately aggressive approach to investing (40-60% stocks) if you have an investing horizon of 3-5 years 

• New House
• Work Leave
• Home Improvements

C) Have a more aggressive approach to investing (>70% stocks) if you have an investing horizon of >5 years 

• Retirement
• 2nd property 
• Children’s University Tuition

The remainder of your investments should be comprised of bonds, commodities & Cash. 

What Stocks Should I Choose?

In general, you want to buy stocks that have performed well over time (commonly called “blue chip” stocks). These stocks tend to be more expensive but are lower risk when compared to cheaper, or penny stocks. 

You want to invest in stocks & companies that are going to be around in 10-20 years. 

This is another reason why Mutual Funds & ETFs are becoming so popular. 

If you have 25% of your investments in Tesla, and the Tesla stock tanks, you will be in a world of financial hurt (remember Enron & Lehman Brothers). 

Investing in ETFs & Mutual Funds allows you to invest in several stocks, diversifying your portfolio, and ultimately reducing your risk. 

You can also invest in cheaper stocks and newer companies, but you should do this with money that you financially stand to lose, as the volatility with these smaller stocks can be high.

The Motley Fool can be a great resource for Canadians. Leverage their expertise as much as possible

4 Tips to Help You on Your Financial Wellness Journey 

1. Determine whether or not you’re at a point in your life where you can properly invest your savings (be out of high-interest debt). 
2. Use the tax-advantaged accounts offered by the Canadian government to help reduce your taxation (RRSP, TFSA, RESP).
3. Conclude whether or not you’d like to invest in a traditional or a robo-advisor.
4. If you’d like to forgo the Robo-Advisor route, choose the right mix of stocks & bonds based on your risk profile and investment horizon.

Canadian Investment Series

Read >>> Investing in ETFs

Read >>> Investing in Bonds