Investing in stocks can seem daunting at first, but the key to getting a head start into investing is to have a well-defined objective and a financial plan to achieve your unique goals.
Investing in stocks can become more attainable when investors take a step-by-step approach and utilize an organized framework as outlined below to create long-term wealth.
1. Select a Trading Platform
In order to invest in the stock market, choosing the right brokerage or trading platform to access the markets is the first step.
Here are 3 options for Canadians.
Interactive Brokers offers access to global markets at a low-cost fee structure. The platform is geared towards relatively sophisticated and active market participants.
- Platform capabilities enable short selling, use of margin accounts and access to global markets on a low-cost basis suiting advanced and sophisticated users.
- Futures and options are supported on the platform.
- Understanding commissions may be difficult at first.
Wealthsimple Trade is a long-only platform focused on US and Canadian equity markets. Wealthsimple offers commission-free trades and access to cryptocurrency markets.
- Commission-free trades with a solid mobile app and a desktop website with a clean, simple user interface is a great starting point for new investors.
- Cryptocurrency investing is supported.
- Lack of futures/options, short selling and leveraged investing.
Questrade is a good balance between a free platform and a low-fee discount broker. This hybrid approach is broad-based and has enough appeal for both long-term investors and active traders.
- Questrade borrows features from both full-service and online discount brokers to bring the best of both worlds. Leveraged accounts and short selling capabilities are strengths of this platform.
- Pre-built portfolios are available at flat fees.
- May not be the most cost-effective platform for the value being provided.
When deliberating on an investing platform, investors need to keep in mind several factors such as asset classes they’re considering investing in, investing style (passive or active), use of leverage (margin or derivatives) and execution costs (slippage, commissions, brokerage).
By honing in on what non-negotiables they desire from their broker, investors can select their ideal investing platform and kick off the security selection/portfolio construction process.
2. Open an Investment Account
Canadians can choose to open a registered account or a non-registered account based on their long-term goals, personal situation and eligibility criteria.
A registered account is a specified holding container for financial securities that are subject to certain rules and restrictions, but offer tax-incentivized advantages.
A Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are the two most common registered accounts.
Any gains within a TFSA are tax-free, allowing Canadians to compound and grow their capital while avoiding capital gains along the way.
On the other hand, an RRSP contribution that is subject to eligibility rules can offset income during the year contributed or subsequent periods, thereby reducing tax liability in the process.
TFSA limits are more liberal and increase every year by a predetermined amount.
However, RRSP limits are a derivative of total income declared the previous year and contributions made towards those limits.
These limits increase by 18% of the total income declared in the previous tax return for the subsequent year.
Furthermore, RRSP withdrawals can be made for specified outlays such as the Lifelong Learners Plan (towards funding education/tuition payments) or the Home Buyer’s Plan (to acquire residential real estate for primary residence purposes).
Any withdrawals made need to be repaid on a specified schedule; otherwise, these withdrawals will be subject to taxes that particular year.
Did You Know?
Unlike the RRSP, a TFSA places no restrictions on contributions based on age. Investors can utilize the tax shield for as long as they desire regardless of their age when making the contribution.
Non-registered accounts, on the other hand, are subject to capital gains/losses but allow investors to withdraw capital freely and employ more active, short-term strategies as they desire.
The simplest example is a cash account.
Upon selecting the account type most suitable for the investor, they can complete the account opening process and submit the necessary documentation to set up their account to start investing.
Usually, this process can take between 5 to 7 business days.
Once the account is set up, the investor can deposit funds using approved deposit methods.
3. Choose an Investing Strategy
Beginners entering the investing world need to clearly articulate their long-term goals and objectives along with their risk tolerance to achieve these targets.
By tethering their goals with the resources they bring to attain them, investors can lay down investing rules and guidelines to hone in on the type/kind of opportunities they will pursue in the marketplace.
Certain styles have gained momentum and favour in recent years which have worked remarkably well for those pursuing them.
Here are a few investing strategies and styles that have been popular and resulted in long-term value creation:
Investors choose to position their portfolios by selecting high-growth companies that are innovating and employing technology to disrupt existing market categories.
Some of the companies that fall into the growth category are Palantir, Tesla and Airbnb.
Investors will find that these companies usually outperform indexes in low inflationary periods and easier monetary policy environments.
Under the value investing methodology, investors seek to identify and invest in stable, free cash flow generating businesses that have a marketplace advantage in their specific industry/niche.
Warren Buffett and other prominent Wall Street investors have adopted such a style to compound wealth and weather turbulent market regimes.
Although such a style has underperformed growth stocks in recent years, with a shift in the business cycle and ongoing inflation expectations, value investing is coming back in style and investors are embracing value names.
Bridgewater Associates popularized this investing methodology where it embraces diversifying in uncorrelated securities to optimize the return generated while minimizing the risk taken.
This style is slightly more quant-based and will seek to smoothen investing returns by allocating capital to different asset classes to create diversified return streams.
The strategies listed above are some of the countless investing methodologies out there that investors can pursue.
Discipline, position sizing and completing thorough due diligence are some of the most important cornerstones to succeed while using a given investment framework and portfolio performance can be based on multiple changing variables.
However, without a streamlined and focused investment planning process, investors can face disparate returns while opening themselves up to unforced errors and common, avoidable pitfalls.
4. Fund Your Account and Start Buying
Once a strategy is chosen, investors can fund their brokerage account and initiate trades.
Most brokers have several methods to deposit funds and these vary from broker to broker.
Oftentimes, a bank wire/electronic transfer is the most reliable and cost-effective manner to fund your account.
These can take 2-3 business days to show up in your account and there are no additional costs to use this deposit method.
Another popular method is adding your broker as a payee under the bill payment section of your online banking app.
This provides a quick and timely deposit method with faster processing in some cases.
Once your funds are credited, you can now begin building your portfolio by allocating capital.
To look up a particular stock, you can search using the trade/quote section on your investing platform.
Once you’ve loaded the security, you’ll be able to view relevant trading information about the stock such as opening price, trading volume, high/low of the day and much more.
Upon analyzing the information, investors can place buy/sell orders using market or limit orders.
Market orders execute immediately based on the prevailing prices while limit orders will execute at the desired price levels (or below).
The stock will show up as an open position with the cost of acquisition, quantity, and unrealized profit/loss on the position in the dashboard of the investing platform.
Frequently Asked Questions
- Is $500 enough to invest in stocks?
With no account minimums at some discount brokers and zero-commission trading, $500 is enough to get started investing in stocks. Some stocks may be priced in excess of $500 but fractional ownership will allow investors to work around this problem and build their portfolio with stocks irrespective of their price within a $500 budget.
- How do you make money with stocks?
Making money with stocks is a by-product of buying at the right level and catching price appreciation on the long side. Some investors might make money by selling overextended and overvalued securities to buy them later at a cheaper rate. Such investors/traders are called short sellers and they might be more sophisticated in terms of their investment research and security selection process, but highlight another avenue to make money with stocks.