How to Start Investing in Canada: 9 Steps to Success

So, you want to start investing in stocks. Maybe become a stakeholder in some of Canada’s biggest companies? Capitalize on their growth and build long term wealth that will change your family’s financial outlook? 

Investing in stocks is a wise choice, and, when done right, it can help you earn a lot of money. 

But investing in stocks is a big decision. If you are like most Canadians, you may not know where to start. Will you manage your own stocks or let a robo-advisor do the work? Do you want to handpick them or pool your money with other investors in a fund? Buy-and-sell frequently, or “set-it-and-forget-it”? 

If you don’t have answers to these questions, don’t worry—The Motley Fool helps thousands of investors just like you around the world answer questions like these every day. 

Investing in stocks starts with the right knowledge. We’ll take you through the basic steps to investing in stocks in Canada. 

9 easy steps to start investing in Canada:

Let’s break it down.

1. Assess your risk tolerance

Risk tolerance is hands-down the most important consideration when building an investment portfolio. In a nutshell, risk tolerance is basically an investor’s capacity—emotionally and mentally—to stomach losses and handle negative movements in their overall investment portfolio. 

For example, if you have a high-risk tolerance, then you can more easily brush off a period of negative returns. Losing thousands of dollars in a short period won’t phase you—at least not as much as those with a low risk tolerance, who might sell out to avoid further loses.

The following are some risk profiles that you might find yourself more or less aligned with:

• Conservative investor. You don’t want to lose money. Period. Just the thought of market volatility makes you squeamish. You would rather put your money in slow-growing bonds and safe investment vehicles (like GICs) rather than invest it in stocks. You might be retired, a few years away from retirement, or in need of a large sum of liquid cash.

• Moderately conservative investor. You’re okay losing some money, but not anymore than 60% of your total investment portfolio. You would like to invest in some stocks, but mostly in companies that are large, predictable, and very stable, such as Royal Bank of Canada, Enbridge, and other blue-chip stocks. You might be nearing retirement, or you would like to hold-on to as much of your money as you can, while also capitalizing on some growth.

• Moderately aggressive investor. You’re okay losing money in stocks and other investments, even if your profile goes into the red. You want to capitalize on the upward growth potential of new, unfounded companies, but you also want some stability from well-known brands. You’re likely not going to retire anytime soon and have some time to take risks with small- or micro-caps.  

• Aggressive investor. Losing money in the short-term is a part of your investment strategy. You know that short-term loses can be balanced out by long-term growth. You want to invest in up-and-coming companies that have exciting new products but little revenue to sustain their growth. You have little interested in well-known companies that have no upward growth potential. You’re likely far from retiring and have plenty of time to balance out your loses with gains.

2. Choose Your Investing Style

Before you start investing, you need to decide what kind of investor you want to be.

Some people like to be very involved in their investments. Others prefer to step back and let others manage their money. While everyone approaches stock investing with different objectives, most fall into two big camps: active and passive investing. 

Active Investing

Active investing is as DIY as you can get. You set your own objectives, then find the right stocks to meet (or exceed) them. You’ll buy stocks through an online broker (as opposed to a robo or human advisor), and you’ll most likely choose individual stocks over baskets of investments (mutual, index, or exchange-traded funds). 

As you can guess, active investing requires a lot of time and knowledge. Active investors are always on the lookout for investment opportunities. Active investors conduct frequent market research and analysis. And they know when to buy and sell at the right moments. 

When done well, active investing can yield some extraordinary gains. When done poorly, however, it can lead to some disappointing losses. 

Passive Investing

The passive investor wants to take advantage of growth, too, but they don’t have the time or knowledge to do it by themselves. Even if they did have the time to learn, they may not want to. They probably have better things to do than analyze the market. 

Active investors might balk at this, but passive investors achieve long-term growth by using robo-advisors to manage their stocks and mutual, index, or exchange-traded funds to diversify them. They’re fine with moderate growth, since they know employing a “set-it-and-forget-it” strategy will yield better long-term gains than anything they could do on their own.

Our Foolish Advice on Investing Styles

As a beginner, engage in active investing only if you have the time and patience. If you’re too busy to spend hours on investment strategy, start with a more passive approach. You can always become more active as you learn more about stock investing. 

As you continue to learn about investing, we do encourage you to become an active investor to better manage your finances.

3. Decide How Much You Can Invest

Most beginning investors assume they need a large lump sum to invest in stocks, but that’s not true. What you actually need is the dedication to invest frequently and consistently, over a long period of time, ideally until retirement. 

To be in that position, you should have:

• a steady flow of income
• enough money to cover your monthly expenses
• extra cash for investing

Additionally, you should have a solid emergency fund, savings account of liquid cash that can cover three to six months of living expenses. Having an emergency fund will help you resist the urge to cash out your investments if you lose your job or experience a market downturn. 

With these in place, you can decide how much to invest in stocks. The amount you invest monthly can fluctuate over time, sure. For now, you’re just trying to establish a habit of investing frequently. 

Can You Invest in Stocks with Little Money? 

Yes. You can buy shares for as little as $10 (some even less). As you might expect, buying stocks with little money comes with some caveats. 

Here are some things to keep in mind before you buy smaller stocks. 

• You might have trouble diversifying. With little money, you won’t be able to buy as many stocks as diversification requires.
  
• Some stock investments (like mutual funds) have minimums. Certain stock shares and mutual funds have high minimum investments. As a result, your fund choices might be limited.
  
• You could get bogged down in fees and commissions. Investing a small sum may not be worth the cost (though nowadays low or no fee stock trading is becoming more common). 

One way around these problems is to invest in a low-cost index fund or exchange-traded fund (more on these below). These funds help you diversify at a low price. Plus, they almost never have minimum investments. 

You should have three to six months of expenses saved before you start investing. Realistically, you can get started investing with as little as $1,000. When you have more money to invest, you can slowly add to your positions over time. 

If you’re an active investor, you can start buying stocks you believe will be winners after doing the right research.

4. Pick the Right Kind of Stock Investments

Stock investing isn’t one-size-fits all. You can buy stocks directly, or, if you want to take a passive approach, you can buy a fund (which essentially chooses them for you).

Let’s take a closer look at these two approaches and see which is better for you. 

Investing in Individual Stocks 

The first option is the one most people think when they hear stock investing: buying an individual stock. If you’re interested in buying individual stocks, find companies you believe will perform well over the long-term. Buy a share (or several) through an online broker. 

For beginning investors, picking individual stocks presents a steep challenge. And that challenge isn’t all mental—it’s emotional, too. When the market tumbles, you need to have the emotional fortitude—the courage, patience, and conviction—to hold on to your stock choices. That can be tough, especially when you’ve never experienced a market downturn before.

Additionally, you need the time and desire to research, analyze, and pick out the right companies. If the thought of reading balance sheets and flow charts makes you yawn, you might want to invest in funds. 

If, on the other hand, you’re the DIY type who’s excited by the idea of getting extraordinary gains after combing through companies and picking the best deals, á la Warren Buffet, by all means—go for it. 

Our Foolish advice: Don’t let big numbers alone guide your decision and don’t be discouraged to take control of your financial future. 

Always scrutinize the companies behind the numbers. Use an independent credit-rating agency, like A.M. Best, to analyze each company’s financial standing. Additionally, look at their historic performance, especially during market downturns.

Investing in Funds 

Fortunately, for first time Canadian investors, picking individual stocks isn’t your only option. You can also buy a basket of stocks for a relatively low cost. 

These baskets are called funds, and they come in three different types: mutual funds, index funds, and exchange-traded funds (ETFs).

Mutual Funds

The most common type of fund, though not always the best, is the mutual fund. A mutual fund is a collection of investments (stocks, bonds, and other assets) packaged under one price. Mutual funds allow investors to pool their money and buy numerous stocks, many of which they wouldn’t have bought on their own. 

Most mutual funds are actively managed. That means a financial professional is responsible for managing the fund’s investment, rebalancing if necessary, and making sure the fund meets its financial objectives. 

Because of this active management, mutual funds often have higher fees. In addition, the fund manager’s frequent buying-and-selling triggers more tax events (read—more capital gains taxes). If your mutual fund has an excellent manager, the gains you receive may exceed the extra costs.

Index Funds

Index funds are somewhat similar to mutual funds: for one price, you get a basket of investments, which helps you diversify your portfolio and avoid market risks. But aside from being a basket of stocks, index funds differ significantly from mutual funds. 

For one, index funds passively track an index, like the TSX/S&P 500, rather than follow a mutual fund manager’s investing strategy. This kind of passive management results in fewer taxable events, since the fund manager doesn’t have to buy and sell stocks so frequently. It also means lower fees, too. Since you’re not benefiting from a financial professional’s guidance, you’re not paying for a financial professional’s guidance when you invest in an index fund. As a result, these funds are relatively inexpensive. 

Index funds allow you to benefit from a successful index, without requiring you to buy individual shares in every company within it. Over the long run, this passive tracking often outperforms many actively managed funds. No financial professional, no matter how impressive their investing knowledge, can beat the market every time.

Exchange-Traded Funds (ETFs)

Like mutual and index funds, exchange-traded funds (ETFs) offer you the opportunity to invest in numerous companies, industries, and sectors for an affordable price. And, like index funds, ETFs operate under passive management, tracking an index rather than a fund manager’s strategy.

But ETFs have their own twist, and it’s in the name—exchange-traded. Like buying and selling stocks, ETFs are traded on an exchange. Unlike mutual and index funds, which can only be bought and sold after the market closes, ETFs can be traded during normal market hours (4pm EST). For beginning investors interested in day trading, ETFs can give you a taste of both worlds: trade like a stock by day, diversify like a fund by night. 

Just don’t overlook the costs. Trading an ETF typically involves paying commissions. These are often low—ETFs are extremely affordable—but if you trade frequently, they can add up. And don’t get too carried away with the day trading, either. Taking advantage of short-term gains might sound appealing (and if you do it right, it can be) but if done frequently it can hurt your portfolio’s long-term growth. 

RELATED: ETF vs Index Fund: Which Should Canadians Invest In?

5. Choose a broker

Once you’ve figured out which stock investments are right for you, you have to decide how to buy them. That’s where a broker comes in. Brokers are intermediaries who connect you to stock exchanges, like the TSX. You give them an order, and they’ll execute it on your behalf.

In Canada, you have three main options:

Online Broker 

An online broker gives DIY investors a place to pick, buy, and sell individual stocks, all without the guidance of a financial professional. Because you buy and sell your own stock investments, you don’t have to pay commissions to an actual broker, or someone who does the trading for you.

Good for: All-around great platform and features for beginners and experts alike

Qtrade

Trading Commission	$8.75
Account Maintenance Fee	$25/quarter Waived if: it is less than one quarter since account opening, you have $25,000 or more in assets, completed 2 commissioned trades in the last quarter, completed 8 commissioned trades in the last 12 months, set up a $100/mo recurring deposit, qualify for the Young Investor offer.

• Pros & Cons
• Fees & Charges
• Sign-up Offer

Pros

• User-friendly platform
• 105 commission-free ETFs
• Strong suite of research and tools

Cons

• Platform is not fully commission free
• Charting tools are not as robust as those on some competing platforms

• Trading Commission: $8.75
• Account Maintenance Fee: $25/quarter
  Waived if: it is less than one quarter since account opening, you have $25,000 or more in assets, completed 2 commissioned trades in the last quarter, completed 8 commissioned trades in the last 12 months, set up a $100/mo recurring deposit, qualify for the Young Investor offer.

• Get 1% cashback or more + $100 sign-up bonus + free trades! Use promo code SUMMERBONUS2024. Offer expires November 30, 2024.
• Receive up to $150 + tax when the client transfers in $15,000 or more (can be combined with cashback offer).

Robo-Advisor 

Unlike an online broker, a robo-advisor chooses and manages stock investments for you. When you open an account, your robo-advisor will gather information about you—your income, financial goals, and risk tolerance. Based on that information, your robo-advisor will build an investment profile designed to achieve your objectives. 

Robo-advisors have affordable fees and low investment minimums, making them suitable for beginners. They don’t just choose your investments: robo-advisors manage your investments, too. That means they’ll regularly rebalance your portfolio. 

Financial Advisor

If you would prefer a personal touch, hire a financial professional. 

Financial professionals do what robo-advisors were built to do: give you investment advice. But a financial professional can help you with other financial tasks, too.

Some services offered by a financial professional include:

• debt management
• estate planning
• general retirement planning

Financial professionals can be a valuable asset to your finances. They’re especially helpful during a financial downturn: When you may be tempted to panic and sell your stocks, a professional can calmly remind you that holding is a better long-term strategy.

However, they come at a steep price.

Typically, financial professionals charge a percentage of your investment portfolio, or an hourly fee. And they may require a large investment portfolio—it’s not uncommon for professionals to ask for a portfolio with at least six digits.

6. Open the right investment account

Inside your brokerage account, you’ll find numerous investment accounts at your disposal, such as a RRSP, TFSA, or unregistered account. These accounts not only hold your investments, but they might apply certain tax benefits to your earnings, helping you save on taxes when you sell for investment gains. Though there are several accounts, let’s take a closer at the three most common.

Registered Retirement Savings Plan (RRSP)

An RRSP is a retirement account that allows you to invest in most securities while also saving money on dividends and capital gains taxes. RRSPs come with two major tax benefits:

• Tax deductions. RRSP contributions can be deducted from your taxable income. This could potentially put you in a lower tax bracket, thus helping you save on your annual tax filing.

• Tax deferral. You won’t pay taxes on investment gains, dividends, or other earnings until you withdraw money. When you withdraw, you’ll pay taxes at your marginal tax rate, which, if you withdraw in retirement, should be lower than your tax rate in your working years.

RRSPs are best suited for Canadians in high-income brackets who expect to be in a lower tax bracket when they start withdrawing money. For 2023, Canadians can contribute up to 18% of their 2022 income (for a maximum of $30,780).

Tax-Free Savings Plan (TFSA) 

RRSPs have great tax benefits. But they’re not ideal for short-term goals, like saving for a car or a vacation. For these goals, you’re better of with a TFSA.

Like RRSPs, investments held inside a TFSA are tax-sheltered, meaning you won’t pay a dime in capital gains or dividend taxes. Your contributions aren’t tax deductible, however, but you also don’t have to pay taxes when your withdraw from your TFSA.

TFSAs are better suited for Canadians who want to use their investments to fund short-term projects, or who anticipate needing quick access to their investment money. For 2023, Canadians can contribute up to $6,500 in their TFSAs.

Non-registered accounts

A non-registered investment account is your basic investment account. It does not have tax benefits—like tax deferral on gains or tax deductibility—but it also doesn’t have contributions limits, either. These accounts are better suited for Canadians who have maxed out their registered accounts or who want to engage in investing practices that aren’t allowed in TFSAs and RRSPs (like margin trading).

7. Diversify Your Stocks

Diversification is the practice of investing in numerous companies, sectors, and even assets (bonds, commodities, real estate) to lower your portfolio’s market risk.

You’ve probably heard the saying, “Don’t put all your eggs in one basket.” here’s where it really applies: diversification (putting your eggs in multiple baskets). 

When you diversify, your money is spread among several companies and industries. As a result, there’s less of a risk that one company’s downfall becomes your downfall, too. 

What’s the best way for Canadians to diversify? 

If you buy any of the three funds listed above (mutual, index, or exchange-traded), you have nothing to worry about: your fund manager diversifies the stocks for you. 

DIY investors who want to pick their own stocks, on the other hand, have a steeper task. One rule of thumb: buy individual stocks in at least 10 to 15 companies across multiple market sectors. 

Don’t miss that: multiple sectors. You might feel tempted to buy stocks in only the best financial companies, since the financial sector dominates the Canadian market. But all it takes is one recession to crush a sector. Multiple companies, multiple sectors: that’s true diversification.

8. Keep a Steady Eye on Your Portfolio

While you don’t want to obsess over your stocks — checking and rechecking like they’re some kind of social media — you do want to check them from time to time. It’s usually a wise idea to check your holdings once a quarter. 

One reason to check your stocks every quarter is to make sure your stocks still fit into your overall investing strategy and risk profile. You’ll often hear this called asset allocation or balancing high-risk investments (stocks) with low-risk investments (bonds and cash). 

If your stocks have a great year, your asset allocation can become unbalanced. More money in stocks means, proportionally speaking, less money in bonds. To rebalance, move money from your stocks to your lower risk investments until you have the right ratio.

9. Invest Consistently for the Long-Term

Whatever your reasons for investing, remember—a surefire way to build wealth in stocks is to invest in great businesses and stay invested for the long-term. 

Trust us: you’ll experience quite a few market corrections and bear markets, maybe a recession or two (or three). You’ll feel the temptation to abandon your long-term goals to avoid further short-term losses. 

Never—never—sell investments out of fear. The market will have its downs, sure, but it always has its ups. In the short term, you’ll probably experience some losses, but in the long term, you’ll likely see your investment grow.

You may only have a little money each month to invest to start, but consistently investing a little bit every month grows over time.

That’s the beauty of investing in stocks: you start out with a hundred, maybe a thousand dollars, and after years and years of investing, you look up and see you’re near seven digits. 

Advice for Beginner Canadian Investors

Canada has the strongest banking system in the world, and an equally strong resource market — not to mention some of the best tax breaks the stock investing world has to offer. Here are three ways you can start taking advantage of the Canadian stock market.

Open a Registered Retirement Savings Plan (RRSP)

An RRSP is a tax-sheltered retirement account. It allows you to contribute pre-tax dollars from your paychecks and let them grow tax deferred. That means you won’t pay taxes on investment income inside an RRSP until you withdraw money from your account. The advantage of tax-deferral: by the time you start withdrawing money (ideally in retirement), your income will be smaller, your tax rate lower, and the taxes you pay significantly reduced.

Don’t miss tax advantage opportunities

Dividends are basically a portion of a company’s profit paid out to shareholders. If you own dividend stocks, you’ll get paid (usually cash) quarterly, semi-annually, or annually. In Canada, many dividends are eligible for a tax credit, which reduces how much you’re required to pay for taxes on dividend income.

Don’t try to time the market

Timing the market is an attractive strategy, as it promises immense short-term gains if you sell at the right time. But that’s the problem—knowing when to sell. Nobody knows how stocks will fluctuate, and it’s easy to sell at the wrong time. A safer strategy is to set-it-and-forget-it and build wealth in the long-term.

Online brokerage services are offered through Qtrade Direct Investing, a division of Credential Qtrade Securities Inc. Qtrade, Qtrade Direct Investing, and Write Your Own Future are trade names and/or trademarks of Aviso Wealth Inc.