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How to Buy Stocks in Canada: The Ultimate Beginner’s Guide

Investments in stocks are always considered a risky move but just like earning income is a part of life, investment should also be a prominent part. As per a Phillip Fisher quote, “The stock market is filled with individuals who know the price of everything, but the value of nothing.” And thus, you must know what you are getting into and what you want to get out of it because a lot of people know what they are investing in but they don’t know why they are investing in it. If you are new to investing don’t worry because this is your ultimate guide to know how to buy stocks in Canada!

I understand that investing in the stock market can be tricky and challenging for most people but once you get to know the functionality and learn it, you will be able to create wealth for yourself. Though please note that return is not guaranteed anywhere, but it is on you to learn from your mistakes and implement your learnings. So, without any further wait, let’s get started!

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Learn the Stock Market Terms

Letters get started with understanding the simple terms associated with the stock market before we get into its technicals. 

What is an IPO? 

When a company wants to list its security on a stock exchange, it does so with an Initial Public Offering aka IPO. You would have heard the words that the company is going public. So, this going public is done via an IPO. A company simply lists its shares on a particular exchange from where investors can take part in this company. 

When a company issues its security for the second time, it is called secondary listing. It is known as a Secondary Market Offering. People can invest in a company when the company goes public by applying for an IPO and after the OPO launch, they can sell or buy the stock in the secondary market. The secondary market is the marketplace where people buy and sell securities freely during the regular market house. For example, NASDAQ, S&P 500 exchanges on the secondary market to trade stocks. 

What is Common Stock?

Common shares are also then known as common stock. The company divides its equity into small parts and then lists them on the stock market from where you buy the stock. This stock gives the shareholder ownership in the company. The shareholder also gets the voting rights in a company’s annual or special meeting. 

What are Preferred Shares?

This works just like common share, but you do not get the right to vote in a company’s general meeting. But yes, definitely, you get a preference over common stock and that is why the name! Any dividend has to be paid to preference shareholders before common shareholders. Even when a company goes bankrupt, preference shareholders are given priority over common stockholders.

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What is Share Dividend?

When an organization earns profit, they have two options. The first one is to invest the profit in the company and the second option is to distribute it among the shareholders. The amount distributed here is known as dividends. It can be paid quarterly, semi-annually, or annually depending on the company’s policy. Though you should know that you will not always get a dividend; it is optional for the company. But definitely, investing in a high dividend providing company will help you gain profit.

What is Earnings Per Share? 

Earning Per Share, also known as EPS is a tool that will help you to know how much a company is earning per share. In order to calculate this, you have to divide the total profit that a company earns in a financial year by its total common stock outstanding in the market. For example, if a company has a profit of $500 and if its common stock outstanding is $5000, the Earning Per Share would be 0.1.

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Learn the Stock Terms

Now that we have seen general terms related to the stock market, let’s get into what are the terms related to stocks.

stock market

What is a Market Order? 

When you place an order at the current market rate, it is called a market order. Because you accept the prevailing market price the order gets executed as soon as you place it. But because you are not using a specific rate, you may end up paying more or less for the stock you want to buy.

What is the Limit Order? 

Here, an investor or a trader can place a maximum or a minimum rate at which they want to buy or sell the stock. Until and unless you reach this range or this particular rate, your order will not get executed. Here you wait for a specific rate, there can be times when you can miss out on a good investment opportunity. 

What is a Stop Order? 

Stop order helps you to manage your risks. You are supposed to place a stop loss at a specific rate, if the price hits the rate, your order will get executed. Let me help you understand this with an example. Suppose you want to buy a stock at $100. But you feel that the price will go down instead of increasing. So, to secure yourself from falling prices you place a stop order at $97. This will save you from further price fall. For instance, if the price falls to $90, your loss would be $10 but because of the stop-loss, it would be limited to $3.

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What is Margin Trading? 

A lot of time people do not have enough money to invest or trade in stocks. That’s where margin trading comes into the scenario. In this, you take a loan from your broker known as margin on your cash or existing stock. The margin here can be anything from five times to ten times. So for example if you have $10 in your account and if your broker provides 10 times the margin, you can trade stock worth $100. 

This is also known as leverage. Though you need to understand that this is a very risky investment or trade because just like you can get higher profit from a very less amount of investment, you can also get huge losses. And that is why you need to be conscious of what you are investing in and how the fundamentals and technicals of a company are.

What is Bid and Ask Price?

These terms can be a little bit confusing. A bid price is a price at which buyers are willing to buy a stock. This is generally the highest price that a trader pays. An ask price is the lowest price that a seller would get. 

The bid and ask prices depend on how many traders or investors are in the market and what their bidding is. As a matter of fact, as a seller or a buyer, you always get the most unfavorable rate if you are placing a market order. So you may get the highest price to buy a stock and the lowest price to sell a stock.

What is Bid and Ask Spread? 

The price difference between the bid and ask is known as bid and ask spread. It is also the difference between the highest of the bid rate and the lowest of the ask rate.

What is Going Long and Going Short?

You would have often heard that an analyst is long or short on stock. The meaning is simple, going long means buying on a stock and the analyst is bullish (has a positive outlook). Going short means selling a stock (analyst may have a view that the price will fall – a bearish view). 

Now that you understand the simple terms of the market and stocks, it is time to move a step ahead and know the various types of stocks. It’s always good to have more information.

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What Are the Various Types of Stocks?

Common Stock 

As mentioned earlier a common stock is what you can buy or sell during market hours. Here, the common stockholders get the right to vote for a company and they are also a part owner of the company because they have invested in it. Though you need to know that as a common stockholder, you will also have the potential to lose your money in case the company goes bankrupt. 

Because you own the company you are liable to pay the debts and losses. But it is not necessary that every time you will lose your money, it depends on how much money a company has left after paying debt holders and preference shareholders. Common stockholders get the least priority in all such cases.

What Are the Rights of Common Shareholders? 

  • Below listed are some of the rights that you get as a common stockholder. 
  • You get to vote in the company’s general and special meetings. 
  • You get to select board members.
  • Your vote is counted for any major changes in the policy. 
  • You have partial control in the direction that a company goes. 
  • The chance to get a dividend if the company decides to pay. Though to get a dividend, you will have to research well to know which company continuously provides it.

Preference Shares

These shares work just like common stock and are also listed on the stock exchange. Though preference shareholders get more protection than the common shareholders. Preference shareholders are paid dividends as decided in the company policy. Preference shareholders also get the option to convert their preference share into common stock. These types of shares are known as convertible preference shares. If you invest in convertible preference shares, you can get the advantage of increasing stock price.

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What Are the Rights of Preference Shareholders? 

The rights are limited when it comes to preference shareholders. I have listed a few rights below.

  • They are paid dividends before common stockholders.
  • If the company goes bankrupt, preference shareholders would be paid the money back prior to common stockholders. 
  • The potential to convert preference shares into the common stock.

What are Exchange Traded Funds (ETFs)?

What is ETFs

If you do not wish to invest directly into a company’s stock then you can also invest through Exchange Traded Funds (ETFs). This has gone quite popular nowadays where a group of stocks is listed and you can invest in various stocks instead of just one. 

Your money gets divided into small chunks and is invested in various listed companies included in the ETFs. If you do not want to take much risk this can be a good option for you. Not a lot of research is required for this but it is always good to know which companies you are investing in. 

A lot of people confuse ETFs with Index Mutual Funds but they are quite different. Compared to Mutual Funds, ETFs provide more flexibility. Also unlike mutual funds, you do not have to pay any management fees. But yes, there would be a trading fee.

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How Does the Stock Market Work? 

The stock market is pretty unpredictable. You will never know when it will go up or down and when you predict it, there are 100% chances that it can go in the opposite direction. And that is why it is important to know that you are investing with caution. There is a very famous quote by Paul Samuelson, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” This quote may sound dramatic, but it holds 100% value. 

When you invest in a stock, you get ownership in that company. You will own their assets, earnings, as well as the liability and debt. So you get the advantages while you also get the disadvantages. If the company has issued 100 shares and if you have purchased 20 of them, it means that you own 20% of the company. 

While there are numerous stocks in the market, not all stocks provide good returns and not all of them are good to invest in. The stock has to be fundamentally strong for investing.

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The fundamental here means that, 

  • The company should have a strong revenue and profit bottom line. 
  • Its reputation also impacts the share price. 
  • The company management should be at par. 
  • How investors trust it also has a good impact on the share price. 
  • The company needs to have a viable business. 

You will find the stocks of Google or Tesla trading high and you will also find stocks trading for one cent. These companies are listed but the stock is not good and is also known as Penny stock. They are highly risky. 

While we are at it for how to buy stocks in Canada, let us talk about growth stock and value stock.

Growth Stock 

A growth stock is issued by a company that has the upside potential to perform above the market performance. In short, it has a good future potential. 

Value Stock

While value stocks are issued by a company that has good fundamentals but the stock is trading lower than what it should. You can invest in value stocks now and wait for the time to get great returns.

Investing in Stock: Open a Brokerage Account 

This is the most basic step and the pre-requirement step for how to buy stocks in Canada. You need to have a brokerage account to invest in stocks. A lot of online brokerage accounts provide you with discounts and you can open your account within a short period of time. You have to invest a minimum of $100 to start trading but make sure that you open an account at a good place. An easy step for “how to buy stocks in Canada”!

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Top Things to Consider While Selecting a Stockbroker

  • Make sure that it is reputed and renowned. 
  • Know the joining fees. 
  • Compare the joining fees with its competitors. 
  • Know what are the brokerage charges? 
  • What are the brokerage charges for its competitors? 
  • Do they provide an online facility?
  • How much do they charge for the online facility? 
  • How faster is the turnaround time? 
  • Do they provide research material? 
  • How good is customer care? 
  • Does it align with the goal of trading or investment?

What is Dollar Cost Averaging?

You need to know this strategy to learn how to buy stocks in Canada! Suppose, you invest in a stock at $10 on day one. On day 2, the price reduces to $8. So you invest for a share. On day 3, the price falls down $7 and you buy one more share. So the average cost would be $10+$8+$7 = $25 divided by 3 = $8.33. This is called dollar cost averaging. 

A lot of time investors use this strategy to reduce the overall cost. It can eliminate the potential to be eaten by buying stocks at a higher price. This is just the normal averaging method that average cost is your overall cost of buying a stock. You can also make this a full time strategy by investing in a particular stock every week, every month, or every quarter.

Fundamental and Technical Analysis of a Company

You should learn basic fundamental and technical analysis of a company before investing in a stock and learn how to buy stocks in Canada! 

What is Fundamental Analysis?

This analysis involves investigating the financial health of a company. It shows how good the company stands revenue and profit-wise. It tries to find the intrinsic value of a stock which is a measurement of a stock’s worth. If the stock is trading below the instinct value, it is said to be underbought and can be a good investment. In the case where the stock is trading above the intrinsic value, it is said to be overbought and will go down.  

Fundamental analysis considers, 

  • The border perspective of the economy
  • Industry scenario, 
  • Company’s earnings, assets, expenses, liabilities, etc. 
  • Management of company
  • Competitors

It shows how a company is compared to its peers and will you get profit in the long term or not!

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What is technical analysis

What is Technical Analysis?

Technical analysis is a prominent step in knowing how to buy stocks in Canada. It helps traders with short term strategies for intraday or day trading. You need to read between the lines of stock price and fluctuations as well as trends of the market. There is no intrinsic value here; instead, you consider past data sets to derive a pattern or trend which may occur in the near future. Some of the technical analysis strategies and tools are, 

  • Support and resistance level
  • Moving averages
  • Momentum indicators
  • MACD
  • Candlestick Patterns
  • Bollinger Bands

The main difference in both of these analyses is that fundamentals are used for long term investing while technical analysis is for a short period. You need to devote your time to learn the basics for both, but trust me, it is worth it. 

How to Buy Stocks and Canada? 

Now that you have gained a basic understanding of the stock market and how it functions, let us get into simple steps for how to buy stocks in Canada. 

  1. You need to open a brokerage account. 
  2. It can be an online discounted or brokerage account or anything that you prefer. 
  3. The second step is to transfer money into your brokerage account from a bank or investment account. 
  4. The third step is to select an account for investment, for example, non registered account, TFSA, and RRSP. 
  5. Now, this is an important step because here you will have to research for which stock to invest in. The fifth step is to automate the deposit of funds in your brokerage account. 
  6. This is the last step where you create a portfolio and keep an eye on it regularly.

If you are investing a regular amount every week or every month, it is good to automate your fund transfer. It eliminates the need to manually log into your account and transfer it. It can be helpful if you are investing in ETFs for a specific stock at a regular interval. You can get in touch with your brokerage for such options. The options are also available on their websites.

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Are There any Alternatives to Opting for a Broker? 

Yes, the answer is definitely a yes! Instead of opting for a broker or a discount broker, you can also opt for the services of a full-time investment advisor or a portfolio manager. So what is the difference between these both? 

Investment

An Investment Advisor

Here you can get an investment advisory on which stocks you can invest in, how much you should invest in the stocks, at which interval, and what is the expected return going to be. The service that an investment advisor will provide you would be to suggest stocks; you have the final call on which investment you want to do. 

They possess good knowledge of the stock market along with the stock fundamental and technicals. One downside of opting for an investment advisor is that you will have to pay higher fees because they provide a niche service.

A Portfolio Manager

You should also know this option when you are learning about how to buy stocks in Canada! This option is generally for high net worth individuals and institutional investors. The reason behind this is that this is a very expensive service. Here you give funds to a portfolio manager and on your behalf, they will invest money in various instruments such as stocks, bonds, ETFs, index funds, etc. 

Here, the investment decisions are taken by the portfolio manager and you pay fees upfront to the manager to invest your money along with additional fees on the performance of your portfolio. One more reason for higher fees is that \the investment amount is too huge and thus the portfolio managers have to make sure that they can execute your buy or sell orders without impacting the stock prices in the market for retail investors. This leads to higher costs, and you have to pay it. 

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The Bottom Line 

The stock market is a roller coaster ride and if you don’t have a seatbelt on, you can fall bad, really bad. This belt is the belt of risk management that you place while investing which is a must for how to buy stocks in Canada. It can be a stop loss order. It can also be as minimal as educating yourself, learning about stock investing, and learning from your mistakes. 

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

– By Peter Lynch

It is self-explanatory that before investing, you need to know how you are going to survive because the end goal is to create income or wealth. You can also diversify your investing by option for various companies’ stocks instead of just one. You can also choose other financial instruments like SIPs, mutual funds, bonds, and more to reduce the overall risk and still earn a good return. All the best!


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She is currently pursuing CFA (Chartered Financial Analyst) and has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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