How to Buy Stocks in Canada

More and more people are thinking about investing in stocks these days. Whether it’s something you read or something a friend said, they can be a way to make a potential profit and grow your investments.
However, while everyone wants to buy shares at a low price and sell at a high price (for a potential profit), there are many factors you need to consider before taking the next step, including your goals, your tolerance for risk and how market volatility may affect your outcome.

So, what do you need to get started?

Answering these questions will help you determine how you want to approach this important investment journey.

Another important consideration is your budget. Are you planning on putting a bit of money in each month? Each week? Or do you have a lump sum that you want to invest at the start and work with that?

This also begs another question around whether you want to control the investments yourself (i.e. self-directed), or if you’d rather hand the reigns over to a financial advisor.

If you’re planning on going down the self-directed route, the information provided here may be helpful.

If you’re interested in investing on your own, you’ll first need a direct investing account with an online brokerage. There are several different types of accounts to consider, depending on your goals.

Some of the most popular investment accounts include:

Registered Retirement Savings Plan (RRSP) are typically used to save for retirement. Contributing to an RRSP can allow you to defer taxes on the returns you earn on the investments in the plan and to access the funds in retirement years when you may potentially be in a lower income tax bracket.

A Tax-Free Savings Account (TFSA) can be used to save for short- or long-term goals because it lets your savings grow tax-free. A TFSA can be used to save for various types of goals, like an upcoming vacation or large purchase.

Margin accounts¹ can help you boost your buying power by leveraging value in your portfolio. You can borrow against value in the securities you already own to make additional investments and access sophisticated investment strategies, including option trading² and short selling. However, leveraged trades are not for everyone. Along with the potential for greater returns, comes the flip side of increased exposure and risk.

A cash account could be used to save for a variety of goals, can provide flexibility to easily access available cash in the account and you can trade a variety of securities on North American markets.

There are many more accounts available to choose from with TD Direct Investing. You can review them here.

Now that you have an overview of some of the types of accounts available to you, the next step is to consider what types of stocks and companies you want to invest in.

It's important that you spend some time building your investing knowledge understanding the stock market  and researching the companies and sectors you want to invest in. 

Do your due diligence. Research sectors, compare companies within the same sector, compare companies of different sizes. The more you read, the better equipped you are to help make an educated choice about where to put your money.

That said, gains aren’t guaranteed, and no amount of research can protect you against unexpected market turns.

Now that you understand what you’re getting into, it’s time to obtain a quote.

That’s it, you now know the basic steps involved in how to buy stocks.

So, what next? Managing your portfolio.

When investing, it’s important to do your research. If you’re considering an investment, it may be helpful to review the financial information and any research reports prepared by your brokerage firm. It's important to use a range of different ratios and metrics to assess the company’s financial health. Ratios are one of the ways to track a company’s performance and are considered to be an integral part of fundamental analysis. Ratios are calculated using data from a company’s financial statements and can help you compare a stock’s intrinsic or true value to its market price. Some of the most important ratios to consider when making investment decisions are outlined below.

This ratio measures how much debt a company is carrying relative to the equity it has generated from shareholders.   

This ratio measures a company’s profitability and how efficiently it generates profit. Technically, it evaluates how proficient a company is at using the equity they obtain from shareholders to generate an income.

This ratio calculates how much money a company makes for every share of stock it issues.  

This ratio compares a stock’s price with its earnings. It’s commonly used to assess what the market may be willing to pay for a given stock. However, it’s important to compare companies in the same industry or same company’s performance over time.

Investors use this ratio to assess a company’s short-term liquidity and financial health. It compares the value of a company’s current cash balance and current assets with its near-term liabilities. It’s similar to the current ratio, with the main difference being that the quick ratio excludes a company’s inventory when calculating its assets. 

Consider using multiple ratios to get a broader picture of a company’s financial health. Many times investors who are looking to build long-term wealth, also consider investing in dividend stocks and growth stocks. Dividend stocks provide cash payments to investors based on the number of shares that they own. Growth stocks offer a higher growth rate than the average stock. One of the other popular investing strategies is value investing that seeks to invest in stocks that may be undervalued by the market.

It's also important to consider your tax liability when deciding to invest. Income earned from your investments can fall into one of the three categories – Interest, dividend or capital gains. While interest income is taxed at the same marginal tax rate as ordinary income, dividends are taxed at a lower tax rate than interest income.  Capital gains are earned when you sell an investment at a profit, and they need to be reported on your tax return for the year the investment was sold. In Canada, you’re only taxed on 50% of the total capital gains you earn. However, this rate goes up to 67% for gains exceeding $250,000. You won’t pay taxes on investments held in a TFSA or other tax-sheltered accounts. But be aware that if you trade frequently within the registered accounts, your earnings may be treated as business income and taxed at your marginal tax-rate. Income earned on investments purchased using non-registered accounts such as cash, is fully taxable depending on the type of investment income.

You don’t need large amounts of money to start investing but you will need to consider the price of stocks that you are interested in buying. Some brokerages allow you to invest in fractional shares, also called partial shares. With these shares, you decide how much to invest, and will get back a percentage of a share equal to your investment. For example, if a full share costs $100, but you only have $30 to invest, you’ll receive 30%, of a full share. Hence, fractional shares offer the convenience of investing by the dollar amount, not the share.

The process of buying a dividend stock is same as any other stock. You may want to start by identifying companies with strong history of paying dividends. However, past is no reflection of future. Hence, it's crucial to thoroughly research a company and review key financial metrics including but not limited to dividend payout ratio, dividend yield. In addition, it may be helpful to analyze the company's financial health by reviewing its earnings growth, cash flow, and debt levels. Analyzing these factors can help you assess the overall performance of the company and sustainability of dividend payments.

You need to own a stock before the Ex-Dividend Date to receive the next dividend payment. If you buy a stock on or after the Ex-Dividend Date, you won’t be eligible for the next payment. The dividend will be paid to the seller of the stock instead. However, the price you pay for the stock will typically be reduced to reflect the dividend payment being provided to the seller. As a result, while you’re not eligible to receive the next dividend, you’ll at least be able to buy the stock at a lower price.