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How to start investing

Starting out as a first-time investor can be daunting. Read on for tips on how to start investing in Canada.

If there’s one piece of advice the investing experts agree on, it’s this: the time to start is now. The sooner you begin, the sooner you can begin to compound your gains into a sizable nest egg.

For most of us, this means buying stocks (or similar assets like ETFs). Because while equities go down at times, over time the market itself goes up – at several times the pace of a savings account.

So whether you’ve never even dabbled in investing, you own a few stocks you want to turn into a real investment plan, or you just want faster growth, it’s time to get to work.

Get your finances ready

You want to invest money you won’t need right away so it has time to grow. You’ll need to do a few things first:

  • Build your emergency fund. The common recommendation is three to six months of living expenses. You don’t need to keep this money in your savings though. A money market fund (which is a highly liquid fund and equivalent to having the account in cash) at a broker will work fine.
  • Pay off high-interest debt. If your credit cards hit you with double-digit interest rates, you’ll save more by eliminating that debt first than you’d gain with a lot of investments over the short term. Most experts advise you to put any extra cash towards high-interest debt, and start investing only once your debt is paid off.
  • Commit to your employer-sponsored retirement plans to claim any match. If your employer matches even 25% of the money you put into a retirement plan, that’s an immediate 25% gain on your investment! Don’t pass up free money.

With those goals in hand you can open online trading account account (if you don’t have one already) and start investing.

Decide what kind of investor you’ll be

Before you decide how to start investing, spend some time figuring out:

1. What are your investment goals?

Because of the risks involved — and the potential for loss if you are forced to sell your investments early in order to access cash — it is important to have a plan rather than simply throwing an arbitrary amount into the stock market because you happen to be able to afford it today.

Think about what you will use the investment money for. Is it going to be used for retirement? To buy a house? Or is it for something less consequential, such as a vacation, general savings or even “fun money?”

2. What is your time frame?

Your timeframe will be heavily dependent on your goals. Investments regularly rise and fall, and the choices for what to invest in, what account type to invest with, and how you can reasonably expect your investment to perform depend on how long you plan to keep your money invested.

  • Long term: Investors with long-term or retirement goals often keep their money in the market for decades and reinvest their dividends in order to maximize the compounding of their returns. Even if markets crash, they have faith that prices will rebound before they reach their goal and need to cash in their investments.
  • Medium term: Investors who are approaching their goal may be investing for several years. They generally ignore small corrections but may be following a risk management strategy like a hard stop-loss or trailing stop-loss to protect their portfolio during bigger corrections or bear markets.
  • Short term: Investors or traders who put their money to work for temporary opportunities or seasonal trends often develop plans for when to buy and sell or follow technical chart signals, since the timeframe is shorter and the stakes are higher.

Your goal and timeframe will inform the assets you will invest in.

3. How much risk can you accept?

There are 2 types of risk: activity risk and investor risk.

Activity risk

There are 5 main asset classes, and each carries its own typical level of risk. In order from least to most risky, it generally goes: cash, government bonds, corporate bonds, rental real estate and stocks.

Risk typically means unpredictability of returns. With cash, you know how much you have, you know how much interest you’ll get, and you know you won’t lose any of your capital based on government insurance. What you don’t know is a) how high inflation will be and b) how likely your bank is to go under — although the latter has historically been a rare thing.

On the other hand, with stocks, you have much less of an idea about how much the price will fluctuate or how the dividend payout will change. This is why they are seen as the riskiest mainstream asset.

If you can’t afford to lose much money in a given year (or simply can’t stomach much risk), you should put more of your money into government bonds and investment-grade corporate bonds — in other words, bonds from very stable companies.

If you could afford to lose more — say, 15% to 30% of your portfolio — in a bad year, and you would feel comfortable with that level of risk, then you could allocate more money to stocks.

Regardless, there is a strategy for every risk level so that no matter how much risk you are comfortable with, you can invest in the market and don’t need to keep your extra money sitting in cash.

Investor risk

Similar to the difference between a child driving a car and an adult driving a car, there is also risk in the person investing. A new stock trader is taking more risk than an experienced stock investor simply because they are less familiar with trading. You can reduce this risk by learning about and trying different investment strategies with a small portfolio, then expanding as you gain understanding and expertise in a particular asset type or strategy. You can also mitigate your investor risk by putting some or all of your portfolio with a robo-advisor to the work for you while you watch and learn.

A note about risk

In considering how much risk you can tolerate, remember that any drops (or gains) to your assets are only realized when you sell the asset. While it can be tough to watch your portfolio’s value drop, experts always advise holding on to your investments during normal economic downturns (and some even recommend putting more spare cash into the market at these times). Asset values are bound to rise and fall, while the market goes up over time.

4. How much time can you invest?

If you’ll seldom check your stock holdings, consider an automated portfolio like a robo-advisor. If you want control and can check every day, you can consider day-trading. Most of us fall in the middle. Likewise, if you want to invest in real estate, you can buy and manage property – a hands-on job – or pick one of the brokers that will sell you a piece of a deal.

Pick the right trading platform to start investing

Name Product Available Asset Types Stock Fee Option Fee Account Fee ETF Transaction Cost Feature Table description
FREE TRADES
Wealthsimple Trade
Stocks, ETFs
$0
N/A
$0
Free
Get 2 free stocks when you open a Wealthsimple Trade personal account and deposit and trade at least $150.
Pay no commissions when you trade Canadian stocks and ETFs with Wealthsimple Trade.
Interactive Brokers
Stocks, Bonds, Options, ETFs, Currencies, Futures
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
$0
Min. $1.00, Max. 0.5% of trade value
Extensive trading capabilities and global investment tracking.
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
CIBC Investor's Edge
Stocks, Bonds, Options, Mutual Funds, ETFs
$4.95 - $6.95
$4.95 - $6.95 (+$1.25 per contract)
$0 if conditions met, otherwise $100/year
$6.95
$4.95 - $6.95 is applicable for online stock, ETF and option trades only. Pay $4.95 when you qualify as an Active Trader (trade 150+ times per quarter).
An intuitive and easy-to-use platform with access to a variety of tools that help you make smart decisions and trade with confidence.
OFFER
Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95-$9.95
$9.95 + $1 per contract
$0
Free
Get $50 in free trades when you fund your account with a minimum of $1,000.
Opt for self-directed investing and save on fees or get a pre-built portfolio and take some of the guesswork out.
OFFER
Qtrade Direct Investing
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
$6.95 - $8.75 + $1.25 per contract
$0 if conditions met, otherwise $25/quarter
$0 - $8.75
Get up to 50 free trades. Be one of the first 100 new Qtrade clients to use the promo code 50FREETRADES and deposit a minimum of $10,000 (or top up to $15,000 to get $150 transfer fees waived). Valid until December 31, 2021.
Qtrade Direct Investing offers low trading commissions and an easy-to-use platform with access to powerful tools and a wide selection of investment options. Trade 100 ETFs free of charge and thousands more for $8.75 or lower.
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Pick the right accounts

There are several investment account types to start investing in stocks or any other regulated type of investment.

  • Employer-sponsored or employer-matched retirement plans: These must be set up by an employer and offered to employees. While asset selection is commonly limited within these plans, a big advantage is the potential for your employer to match the amount of money you contribute to the account.
  • Registered Retirement Savings Plan (RRSP): RRSPs offer the benefit of tax-free contributions and growth – you only have to pay tax when you withdraw funds. These types of accounts are meant for long-term investment, because you’re heavily taxed on pre-retirement withdrawals. Depending on the company offering the RRSP, you may be able to invest in select investment portfolios managed by a professional advisor, select investment portfolios managed according to computerized rules, select mutual funds or individual stocks, ETFs, options and more of your choosing.
  • Tax-Free Savings Account (TFSA): While RRSPs let you make tax-free contributions, TFSAs let you make tax-free withdrawals. This means you can’t deduct TFSA deposits from your income tax. TFSAs can be used for any type of savings, whether long-term or short-term. Like RRSPs, you can have your investments professionally managed, self-managed or selected and maintained by a robo-advisor. Investments include mutual funds, individual stocks, ETFs, options and more.
  • Taxable investment (non-registered) account: Invest using a normal investment account without any contribution or withdrawal limitations, though capital gains will be taxed.

Taxes on investments

When you invest outside of certain tax-advantaged accounts, you will owe taxes on the money you make, including dividends and gains. Qualified dividends and long-term capital gains (investments held a year or longer) are part of your taxable income – but only on 50% of what you make. So, if you realized a capital gain of $10,000, you’d only have to add $5,000 of this amount to your taxable income.

Income tax rate: Interest, dividends and capital gains are all taxed as part of your income. Taking into account both federal and provincial or territorial tax rates, this generally ranges from just under 20% to over 50%.

Understanding assets

An investment can be anything you think will increase in value over time, but for most people it starts with stocks and bonds. Here’s a deeper look at those investment options:

Individual stocks

In any given year, countless stocks outperform the market average. Tesla grew by nearly 700% just in 2020. Netflix went up 3,900% in the last decade. No question, it’s fun to own the right hot stocks.

But in investing, winning big generally means bigger risks. While many investors start with individual stocks, as you build a portfolio, it’s best to keep stock-picking to a portion of your portfolio dedicated to riskier investments. Keep the bulk of your portfolio in safer places, such broad-market index funds, and mind your mix of large blue-chip stocks vs. riskier mid- and small-cap stocks. Again, this depends on your risk level, but all experts agree that diversification is important in mitigating losses.

Mutual funds and ETFs

Most financial advisors would point novice investors to exchange-traded funds or low-cost index mutual funds before buying a lot of individual stocks. A total market fund will give you a piece of every company in the market; an S&P 500 ETF will give you a piece of the 500 largest.

What they give you is a diversified portfolio across companies and across sectors, which is how you get that steady growth over the long term. When one stock goes down, others go up. To do this with individual stocks is tough; the experts say it takes 20 or 25 stocks at minimum to build a properly diversified portfolio, which takes a large portfolio given the price of market-leading stocks.

In general, ETFs track indexes, matching their performance at a lower cost than mutual funds. You can think of ETFs as a diversified basket of stocks. Mutual funds have active managers who try to juice returns based on different strategies, so they cost more than ETFs. But there are indexed mutual funds and actively managed ETFs, so study the strategy, the track record and the fees closely before you buy. You can read more on the difference between ETFs and mutual funds in our guide.

Consider broad index funds as the basics. Over time, you may want to add sector funds, commodity funds and other classes as you become more comfortable targeting your investments and have more money to work with.

Bonds and bond funds

Bonds are the traditional hedge for a diversified portfolio. When stocks go down, bonds usually go up, though the returns are generally lower.

The old rule used to be to hold your age in bonds – at age 30, 30% bonds, at age 60, 60% bonds. But bond returns have been so much lower for so long that new rules have emerged. One says subtract your age from 110 and put the remainder in stocks. So at 30, you’d be 80% stocks, 20% bonds. Investing sage Warren Buffett has talked about a 90/10 mix for even retirees, with the bulk in a broad market index fund.

You can also buy actual bonds, junk bonds and build ladders of bonds reaching maturity at different times.

GICs

A GIC is a guaranteed investment contract, whereby the company issuing the GIC guarantees the investor a specific rate of return in exchange for your deposit. GICs vary in return based on how long you commit to hold onto the GIC (and in exchange, how long the issuer has your money). GICs are an extremely low-risk way to invest.

Other investment options

  • Residential property: A home is a common investment, as value tends to increase over time.
  • Life insurance: Some types of life insurance — like whole life, variable life or universal life — have a cash value component that produces a guaranteed and/or variable return.
  • Exotic assets: These could include wine, art, cars or anything that could increase in value over time.
  • Peer-to-peer lending: These are websites that allow you to loan money to individuals or businesses for a set rate of interest. It’s possible to earn more on these loans than you would make in cash, but some people are wary of this relatively new financial product.
  • Cryptocurrency: Another new and exotic asset is cryptocurrency, with Bitcoin being the most well-known. Be careful when investing in crypto: It is an exceedingly volatile asset, it trades all hours of the day — even when you’re sleeping — and it can be more cumbersome to set up and fund an account.

Bottom line

The keys to getting started with investing are having a plan and understanding the assets you’re investing in. If you can handle the volatility of investing and want to try to make it work harder than it would in a savings account or GIC, there is an opportunity to grow your money. Evaluate your options and compare the products and services that will help you achieve your goals, starting with online trading platforms.

If you’re looking for more beginner-friendly investment help, you can read more on how to buy stocks here.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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