The Stock Market

Posted on Wednesday 07 January 2015


It is always a good idea to save for the future, but RRSPs and TFSAs aren’t the only options. If approached correctly, smart investments in the stock market have a lot of potential to make you extra money.

Especially over the years.

Wouldn’t that be nice?

The stock market is complicated and ever-changing so it can feel quite intimidating. However, with the right info and support, making your first investment really isn’t too hard.

Set your expectations

First of all, is it the right time for you to invest? Putting money into stocks is never a guaranteed get-rich-quick scheme. Plus unlike the savings in a bank, there is always the risk of losing it. Granted the potential for earning is much higher than the 1-2% offered by most savings accounts, but so too is the potential for loss. If you are struggling with debt , trying to invest your way out of it is a bad idea.

You should always think of these investments as a nice little extra, but not your main source of cash.

Consider the following . . . if you lost everything, would you still be able to buy groceries or make your car repayments? If not, it’s not the safest option for you right now. Most importantly, the stock market is unpredictable, so definitely don’t write a budget on the expectation of a huge return.

Find a broker

While there are many different (and often easy) ways to buy shares these days, it’s not quite as simple as asking the teller at your bank to put cash into savings. You will have to go through a brokerage, and while your bank almost certainly offers one, there are also independent and online options.

  • Discount brokerages will charge you the least per trade, but that’s all you’re likely to get. A discount brokerage will buy and sell your shares (often online or over the phone), but without any extra portfolio or trading advice. If you are confident in your research or plant to start with a small portfolio, this may be the option for you.
  • Full-service brokerages provide a lot more guidance and investment advice. Of course, this comes at a price. For the ease of them managing your trades, you can expect to pay much more per trade. If you plan to run a large portfolio, this may be worth it. If it's a small one, may be not a good idea to use them.
  • A portfolio manager is the most expensive option, but also the most thorough. A portfolio manager will not jut advise you, but also manage your investments. However, portfolio managers work with very high net worth investors. Typically, you will have to invest a few hundred thousand dollars, minimum. Given a sufficiently large inheritance or lottery win , that could be you, but otherwise it probably isn’t.

Open an investment account

Once you’ve decided which type of brokerage service you require, it’s time to open an account. This is where your acquired stocks will be held, as well as other kinds of securities. There are two main types:

  • A cash account is more common and very simple. You put in cash and use the cash to invest. While the risk is still there, it is all your own money so even if the investment goes bad, you will not be left with debts.
  • A margin account however, is a bit more complicated. It allows you to borrow money from the brokerage to make an investment, and you pay them interest on the money you borrowed. This allows you to make bigger investments. Which can mean larger profits. Of course this also carries greater risk. You pay interest on the borrowed money no matter what, so there is the always the potential to lose money.

The amount you can borrow from a margin account varies depending on the shares you buy, up to 70% of the purchase price (However, you can’t borrow on shares worth under $1.50). There are also many more fees associated with this account.

On top of the per trade commission, there may be regular maintenance fee (Especially if you invest a small amount). Try to choose an account that is registered with the Canadian Investor Protection Fund. If your brokerage company becomes insolvent, CIPF protects the first $1 million of your assets.

Getting started in the stock market is an exciting financial move that has the potential to yield some great returns. Once you have a general understanding of the process and have identified the level of risk you’re comfortable with, it’s time to get started. Good luck!