Do you want to invest your money in Canadian stock markets but have no idea where to start? Do not worry, we’ve got you covered.
So, let’s start just there – the basics.
The Basics Of Investing In Canadian Stock Markets
Before the digital age, the process of buying stocks was a tedious one, involving phone calls and even newspapers. The advent of online trading has made things much easier for seasoned as well as amateur investors to trade on stock markets.
You can simply begin by opening an online brokerage account to buy and sell stocks through your laptop or smartphone. There are countless numbers of online brokerage platforms available in Canada. While some charge a fee, some provide their services free of cost.
Apart from purchasing individual stocks, you also have the option to explore Exchange-Traded Funds (ETFs). An ETF is an investment fund that trades on a stock exchange as a basket of securities, such as stocks, commodities, and bonds. Unlike a stock, owners of ETFs have an indirect claim to a portion of profits and residual value in case of company liquidation.
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Key Steps To Follow To Begin Investing
- Set Up An Online Brokerage Account
An online brokerage account can enable you to buy and sell stocks as well as ETFs without the need of a human broker to execute transactions. But while trading via such online accounts can be easy, an investor, especially beginners, need to be careful with their research of the stocks they are investing in.
In Canada, nearly all major banks have a brokerage wing. As their brokerage fees can be considerably higher, investors can explore discounted brokerage platforms like Questrade and Wealthsimple Trade.
- Select Your Investment Account
Investors in Canada have the option of investing via registered or non-registered accounts. However, it is advisable to get your account registered.
Some of the important registered accounts are:
TFSA: Tax-Free Savings Account, or TFSA, enables an investor to earn tax-free returns forever. This account can be used for your long-term and retirement goals. It is important to note that every year, the government gives a contribution limit for TFSA accounts. In 2021, the TFSA contribution limit was set as C$ 6,000.
RRSP: If you opt for a Registered Retirement Savings Plan (RRSP), it can be used to defer taxes on your earnings if you are not making any withdrawals. This is often considered ideal for retirement goals. The RRSP contribution limit is C$ 27,830 for 2021.
RESP: The Registered Education Savings Plan could be a good option if you want to save money for the post-secondary education of your child. The advantage of this plan is that apart from your contributions, the government may grant you up to C$ 7,200 as a contribution.
- Before Investing, You Must Analyse The Stock
As mentioned earlier, this is a crucial step for stock trading.
Once you have selected a type of account, it is very important to research about the company before buying its stock. For beginners, fundamental analysis might help in finalizing a stock.
Under fundamental analysis, you can use the available company data, such as latest financial reports and its outlook for the year.
For fundamental analysis, you may want to keep in mind factors like earnings per share (EPS), price-to-earning (P/E) ratio, debt-to-equity ratio, dividend payouts, etc.
Once you get an idea of the stock markets, you can start doing technical analysis with price charts and historical data of the stock in question.
Analyzing moving averages, relative strength index and trend channels come under technical analysis.
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How Many Types Of Stocks Are Available On The Stock Markets?
Broadly, there are two types of stocks – common shares and preferred shares.
Common shares are often the first choice of an investor as it gives you voting rights on company matters and makes you a part-owner of the company.
As a common shareholder, you have some claim over the company’s assets and profits, although dividends are not guaranteed. The disadvantage of common shares is that if the company fails to succeed, then bondholders, preferred shareholders and other creditors are considered first for payments.
On the other hand, when it comes to preferred shareholders, an investor has a greater claim over assets and profits because preferred stockholders get a fixed dividend amount per share. In case of bankruptcy, preferred shareholders get preference over common shareholders.
Pros of Investing In A Stock Market
Keeping your money in saving accounts is considerably a more secure option, although it can only yield fixed returns. Stock market trading comes with a set of risks that investors should always keep in mind, but if done carefully, it can bring notable gains.
Investing in equities is also often looked at as a good option when seeking to outpace inflation. If you invest in a company that does it well, its stock prices are likely to go up and give you returns.
Many companies pay regular dividends to their shareholders. If you invest in some dividend-paying stocks, you might also get timely returns on your investments.
Another advantage of investing in stocks is that you can buy and sell them without affecting the share prices significantly. This is due to the liquidity of stocks on a stock exchange.
Cons of Stock Trading
One of the major disadvantages of stock market trading is its volatility.
Share prices of companies, no matter how robust in performance, are always open to fluctuation. And if there is an economic downturn, holding on to stocks can become quite challenging.
While there is chance that your stock investments can give you significant returns, there is also a possibility that they might offer you nothing in return. There is always the risk of total loss because a company can fail due to several reasons.
This is an important reason why research and careful investment planning are thoroughly encouraged when trading in stock markets, whether you are a seasoned investor or a beginner.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.