The Stock Market

Posted on Wednesday 07 January 2015

RRSPs and TFSAs are great places to put your savings, but they are not the only options. Making smart investments in the stock market is a great way to diversify your portfolio and make some money. This guide will not turn you into the Wolf of Wall Street, but it should show you that getting started in the stock market isn’t difficult. So, where should you start?

  • Set your expectations. Is it a good idea for you to branch out beyond the easy options right now? Unlike your savings account at a major bank, any money that you invest in stocks can be lost forever. While the potential gains are greater than the 1-2% that most savings accounts will give you, prices can go down as well as up. If you are struggling with debt , trying to invest your way out of it is a bad idea. When setting an investment budget, ask yourself what would happen if you lost every penny of it. If losing it would affect your basic living costs or debt repayments, you can’t afford to invest it. Think of your trading account as a supplement to the safe, predictable investments in your portfolio. Second, to reiterate, you won’t become the Wolf of Wall Street overnight. Don’t expect to make a huge return, and definitely don’t write a budget on the expectation of a huge return.
  • Find a broker. You can’t just walk into your local bank and order a bundle of shares. As an ordinary investor, you will have to go through a brokerage. Your bank almost certainly offers one, but there are also independent and online options. There are three major types of brokerage, discussed here in ascending order of cost. Brokerages tend to charge per trade, and discount brokerages have the lowest per-trade fees. Many will also let you issue trade orders through automated online or telephone systems. However, you are unlikely to get anything else for your money. Specifically, you will not be offered portfolio or trading advice. A discount brokerage will buy and sell your shares, but everything else is up to you. A full service brokerage will give you investment advice as well as managing your trades, but you can expect to pay a lot more per trade than you would for a discount brokerage. If you plan to run a large portfolio, this may be worth it. If you would prefer to trade penny stocks, it almost certainly isn’t. Finally, a portfolio manager will not just advise you, they will manage your investments for you. 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 with a broker once you know what kind of brokerage service you require. Your investment account will hold stocks and other kinds of securities as well as cash. There are two main types. A cash account is the more common kind, and they are very simple. You put in cash, and you use the cash to invest. A margin account is a bit more complicated. You borrow money from the brokerage and then invest with it, and you pay them interest on the money you borrowed. This allows you to make bigger investments than you would otherwise be able to, and because you don’t just use your own money, the potential profits are bigger. However, it is also riskier: you pay interest no matter how your investment performs, so losses are bigger. You can even lose more money on an investment than you spent on it. The amount that you can borrow from a margin account varies depending on the shares you buy, and can go up to 70% of the purchase price. However, you cannot borrow at all on any share worth less than $1.50. When choosing an account, make sure that you get a full disclosure of fees. Per-trade commission will not be the only one. There may well be a monthly or quarterly maintenance fee, particularly if you invest a small amount, so take this into account when choosing. Try to also 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.