Stock Investing Basics for Canadians

Do you have a high I.Q.? In this case, I.Q. means investor quotient. Understanding the basics of investing in stocks in Canada can help you expand your holdings. Whether you want to enjoy a comfortable retirement or increase your financial freedom, you need to understand the fundamentals of investing in Canadian stocks.

If you wish to invest in Canadian stocks, you should sign up with a brokerage, simply because trading or investing is easier. However, before do so, you need to review the steps you will need to take.

How to Open Up a Brokerage Account

Let’s go over the basic steps…

  • Open an account with a discount brokerage.
  • Choose the type of account you wish to open.

Some available options include the following:

A Tax-free Savings Account or TFSA

This account provides Canadian investors with tax benefits when saving investment income, including dividends and capital gains. This income is typically not subject to taxation, even when you withdraw the funds.

A Registered Retirement Savings Plan or RRSP

This Canadian tax-preferred account is designed to hold invested assets and savings for retirement. The money is tax-deferred until it is withdrawn at retirement.

A Registered Education Savings Plan or RESP

This registered Canadian account allows you to save for a child’s post-secondary education. Besides your contributions, the government contributes $7,200 in grant money.

A Locked-in Retirement Account or LIRA

This type of account represents a registered Canadian pension fund. Account holders cannot withdraw their money from a LIRA except in rare instances.

A Margin account

This type of account is one where a customer is leant cash by a broker to buy stocks or other financial products. The financing is collateralized by cash and the securities purchased, and includes a periodic interest rate. While this account will increase your buying power by using someone else’s money, you also buy stocks at a greater risk. When you buy stocks on margin, you can also amplify any losses.

  • Next, you will need to establish a schedule of deposits so you can keep your investing consistent. If you sign up with a discount brokerage, this can easily be done by paying your bill through your online bank account and setting up automatic withdrawals.
  • Select an investing strategy that allows you to diversify your stock holdings so you can meet your investment goals (conservative or more aggressive), and tolerance for risk.
  • Invest what you can afford. You don’t have to invest a substantial amount in stocks or bonds, or other investment products, such as Exchange Traded Funds (ETFs), to gain eventual wealth. You can begin by investing as little as $500.

Analyzing a Stock

Before you buy a stock, it helps to analyze the stock, its company, and the company’s products and services. Know what is behind the company and stock to make an informed investment decision. A basic technical analysis will give you what you need to know about a company’s influence on the stock exchange. This data covers a company’s current and available data, including the following:

  • Earnings Per Share (EPS) Price – The measure of a company’s profitability showing how much a business earned for each outstanding common share of stock.
  • Return on Equity (ROE) – How much return on equity a company receives based on each dollar invested by a company’s shareholders.
  • Dividend Payout Ratio (DPR) – The amount of after-tax income paid to shareholders in dividends.
  • Price to Earning (P/E) Ratio – How much an investor is willing to pay for each dollar earned.
  • Debt to Equity Ratio – This ratio reveals how much debt a company holds in relation to its equity. If a company has debt of $500,000 and equity of $250,000, you would figure the ratio as follows: $500,000/$250,000 (total debt divided by equity) = 2:1. If the ratio is higher than 1, it means that the business is financing its operations with more debt than equity. 
  • Price to Earnings Growth (PEG) Ratio – This metric requires measuring a company’s ratio by determining the P/E ratio (or price per share divided by earnings per share or EPS). You can find the growth rate by matching the P/E ratio with estimates listed on sites that follow the stock’s performance.
  • Dividend Yield – The yearly dividend return is based on the annual dividend payout and current share price.

Besides these factors, you also have to review the management of a company, the business’s competitive ranking, its branding, and intellectual property. Don’t get too muddled up in the details. As a beginning investor, it is best to review the fundamental concerns, such as the company’s management and basic metrics, such as Earnings per Share and the Dividend Payout Ratio (DPR).

While this basic information will give you a better idea about stock pricing and risk, you still can make investing even more simplified by opting for financial products, such as REITS (Real Estate Investment Trusts) and Exchange Traded Funds (ETFs). Both products are ideal investments for the beginning stock investor as they frequently offer good returns without the risk of other investments.

Frequently Asked Questions About Stocking Investing Basics for Canadians

What Is the Difference Between a Bear and Bull Market?

While a bull market represents a market that is rising in strong economy, a bear market exists when the economy recedes and many stocks are losing their value. Because the prices are more volatile and many of the equities traded fall in price, you have to be careful about investing in a bear marketplace.

What Is an Exchange Traded Fund or ETF?

An ETF is a type of security that features several securities, such as various stocks. It frequently follows an underlying index, although an ETF can be used to invest in a variety of industry sectors. ETFs are much like mutual funds, except they are listed on exchanges and traded like ordinary stock.

What Is a REIT?

A REIT represents a real estate investment trust or a diversified portfolio of real estate. Investors can invest in the trust with a low minimum to diversify real estate holdings and receive higher returns at a lower risk. Instead of share, you buy trust units in a preferred REIT.

What is a DRIP?

A DRIP stands for an account known as a dividend reinvestment plan – a program that enables investors to reinvest the dividends they receive from a stock to purchase more stock, or fractional shares. Reinvestments can be made by going directly going through the company issuing the stock or through your discount brokerage.

What Is a Synthetic Drip and Why It Is the Best Choice for Beginning Investors?

This type of dividend reinvestment plan is set up with your discount brokerage. All you need to do is inform the company about the stocks you wish to DRIP. Some brokerages will allow you to enroll your entire brokerage account into a DRIP. Therefore, any new or current company shares will automatically be reinvested, for example, in your TFSA or RRSP account.

How Does an RRIF Account Work?

An RRIF account is set up with the federal government so you will receive a steady income when you retire. While you use a Registered Retirement Savings Plan (RRSP) to save tax-free for retirement, you use a Registered Retirement Income Fund (RRIF) to withdraw the accumulated savings.

What Should You Seek in a Brokerage Account?

When selecting a brokerage account, review what types of accounts it features. Most brokerages feature TFSA, RRSP and personal investment accounts.

Check out the minimum investment and see if there are any trading fees. Ideally, the brokerage will not require a minimum investment and will not charge commissions on trades.

See if the brokerage offers any cash bonuses. For example, some brokerage accounts offer a $10.00 cash bonus if you open and account and deposit at least $100 to make trades.

What Is the CIPF?

Make sure your account is protected by the Canadian Investment Protection Fund (CIPF), a not-for-profit that was set up in 1969 by the investment industry in Canada. The fund is designed to protect investor assets in case a CIPF member files bankruptcy.

What Is a Robo-Advisor?

Although this guide suggests establishing an account with a brokerage, some more experienced investors choose to use today’s technology by using a robo-advisor. Also referred to as an online advisor or automated investing service, a robo-advisor uses advanced software and computer algorithms to build and manage an investment portfolio. Because of their lower cost, robo-advisors allow securities investors to begin trading almost immediately.

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Amanda Leach

Fifteen years can be a long time to work in one industry, but not when you are doing something that you love. Amanda has enjoyed the freedom of working as a freelance writer for the majority of her career. She has successfully combined her passion and skill for writing while still enjoying a life filled with travel, learning and exciting new experiences. While she loves exploring all different types of writing, her PhD in Consumer Psychology has made her a sought after writer for marketing, business and technology fields. Amanda is a regular contributor to Smarter Loans.