How Do Stocks Work in Canada-How do stocks work in canada is one of the most popular questions in Canada. If you invest in stocks in canada online , you would like to find out more about stocks for beginners. A stock is a security that represents an ownership stake of a business, or corporation. An investor buys shares in that company which means that they own small piece of it. Businesses are valued via the so-called stock markets where individuals and companies buy and sell securities.
Whether you are Canadian or just happen to be visiting this great country, you may have a lot of questions about how to invest in stocks for beginners before getting started. In addition to the stock market gaining popularity as a good place to build up a portfolio, it can also be a great place from which to snag some tax free cash flow if you’re a comfortable investor. To answer these questions and more, let’s start your education on Canadian trading with a few places where you can start getting more familiar with how do stocks work in canada.
The words “stocks” and “shares” mean the same thing and refer to owning a small piece of a large company.
Ideally, you want to buy shares of a company that will increase its profits over time. The company can decide to pass these profits directly on to you (as one of the company’s owners/shareholders) in the form of dividends, or it can choose to reinvest those profits back into the company – this creates a more valuable company going forward.
As the company gets larger and more profitable from this reinvestment, people will probably be willing to pay more for shares (shares = small pieces of the company) and the value of your original investment will go up.
For example, if you think of the ownership of RBC as a big pie chart, then your pie would have roughly 1.4 Billion slices (shares). If RBC earned $8.4 Billion for the year, they would have Earnings Per Share of $6.
They could then decide to send payments of $3 to each person who owns a share. This would be RBC’s dividend.
Then maybe RBC management could decide to invest in a major asset – like purchasing a smaller bank in Singapore (most of RBCs decisions are not nearly this flashy) and invest the remaining $4.2 Billion (the money left after paying the dividend) into buying this new asset.
RBC would now be worth more than it was before buying the Singaporean bank because it obviously is a larger company, and should increase its earnings the following year as its new bank boosts profits.
That’s a bit of an oversimplification, and companies can do things like buy back their own shares, borrow money to pay a dividend, and other more complicated maneuvers, but that’s the base of it all!
When it comes to the best way to buy stocks in Canada, our most recommended platform is the Qtrade discount brokerage. It’s what we personally use (after trialling many stock trading platforms over the years), and it has consistently been rated #1 by independent sources such as The Globe and Mail.
Table of Contents
Step 1: Open an Online Brokerage Account
Discount brokerages provide an excellent online trading platform for DIY investors to buy and sell securities on their own instead of relying on a human broker to execute transactions. The fees for discount brokerages are rock-bottom, and with a little know-how, DIY investors can take advantage of:
- The flexibility to choose and manage your own investments,
- Low- or even commission-free trading
- Low ETF management fees (around 0.15% to 0.5%)
- Access to real-time data, research tools and analysis
Every big bank in Canada has its own discount brokerage arm, and for many self-directed investors, this can be the most convenient way to start investing on their own. However, there are more affordable options available. For instance, Questrade and Wealthsimple Trade are Canada’s leading low-cost brokerages in Canada.
DIY investors have been using Questrade for its low fees and excellent customer service for more than 20 years. Opening an account is simple, just use our link to sign-up for an account and you’ll get $50 in free trades. With their affordable trading fees, including free ETF purchases, and super-easy online trading platform, Questrade is consistently our top pick for the best online brokerage in Canada.
Wealthsimple Trade is also a great option, as it doesn’t charge any commissions on buying individual stock or ETFs trades. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $50 cash bonus + $0 commission trades. All you have to do is deposit and trade at least $150.
Not sure what platform works best for you? Read our comprehensive comparison on Wealthsimple Trade vs. Questrade.
Step 2: Open a Tax-Sheltered Investment Account
If you’re just getting started with investing you need to decide whether to invest inside of an RRSP, TFSA, or a non-registered account.
An RRSP gives you a tax deduction on contributions, but you’ll pay income taxes on withdrawals in retirement. In contrast, you don’t get a tax deduction for TFSA contributions, but you can withdraw funds tax-free at any time. Both RRSPs and TFSAs tax-shelter your investments. Meaning there are no taxes on your investment income like dividends, capital gains, or interest earned within the account.
Debating TFSA vs. RRSP? A general rule of thumb is that an RRSP makes sense for high-income earners, while a TFSA makes sense for lower-income earners. And if you can afford to contribute to both, that’s great! If you’re leaning towards a TFSA, check out The Best TFSA Investments in Canada to help you get started. Only once you’ve maxed out your RRSP and TFSA, you can open a non-registered or taxable account to invest.
Most online brokers support multiple account types such as joint investment accounts, corporate accounts, or Locked-in Retirement Accounts (LIRAs), allowing you to manage all your investments in one place.
Step 3: Fund Your Account
You can’t invest in stocks without money! Once your brokerage account has been opened, you need to fund it. Ideally, you should be starting with at least $1,000 in your account to invest in the stock market, but more is always better.
Once you make your initial deposit to your investment account, you should also set up an automatic monthly or bi-weekly contribution. This ensures you are consistently building your portfolio and always have cash to take advantage of market dips!
Step 4: Learn some stock market terminology
It’s very likely if you’re done steps 1-3, you are in limbo while waiting for your money to hit your account.
However, use this time to get used to your brokerage. Figure out how you can buy or sell stocks or even exchange traded funds so that when the time comes, you’re ready.
Most brokerages streamline this process and buying can be done in the click of a few buttons.
But before you invest your money, it’s important we go over some basic market terminology.
Lets first start with some ratios that many investors use to make strong, long term decisions.
The price to earnings ratio
Probably the most common investment metric available to those looking to buy stocks, the price to earnings ratio (p e ratio) is a comparison of the company’s stock price to its actual earnings.
Conclusion
There are plenty of reasons why you might want to invest in stocks for beginners. Stocks are a great way to grow your money, especially if you have some money to invest. Stocks are also one of the easiest ways to learn how the stock market works in Canada.