A Beginner’s Guide on How to Invest in Canada

Why do people invest in Canada? Actually, why does anyone invest their money in any financial market? It’s to achieve financial freedom and generate income or value from assets not related to your salary.  There are different ways to achieve this, mainly through active or passive investments.  The typical investment vehicles include bonds, futures, options, stocks, cryptocurrencies, real estate, and small businesses. Income provides the natural base for investment planning. 

The choice of an investment depends on one’s age, income, financial goals and risk tolerance. It is never too late to start investing. You may be way into middle age before you realize time is moving fast, and you need a retirement or old age plan. Whether you plan to retire on a yacht in the Mediterranean or send your kid university, investing is key to achieving your financial objectives. 

There is no shortage of ways to invest in Canada. You can invest in Canadian companies or world markets, through online brokers, robo-advisors, or financial advisors. You can invest in tax-free or tax beneficial ways. Let’s look at the basics of investing in Canada.

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Reasons to invest in Canada

Canada has a stable government and growing economy. It is a G7 country, meaning that is among the seven most advanced economies in the world. Therefore, Canada offers access to regulated financial markets and it can help investors safely build wealth. What are some major reasons to start investing?

Higher investment returns

Investing in securities benefits from returns that you can realize through dividends or capital gains. Bonds pay off the investor through coupons. Real estate uses rental income and capital gains.

Retirement planning 

The majority of people depend on their salary income to meet their daily needs, making it difficult to sustain the same lifestyle in retirement. This means one has to invest a portion of their income during their working years to ensure a nest egg in old age. You can plan everything out with a retirement planning calculator.

Beat inflation

If you leave your money in a chequing account or savings account, even a high-interest savings account, its purchasing power decreases due to inflation. Also, your interest rate is low and taxable. Investing is one crucial way to beat inflation as the money keeps circulating.

Reach your financial goals 

Financial goals may include paying for education, starting a business, having an emergency fund, buying a home and so on. They usually vary with one’s age, level of active income and tolerance to risk. You can use Harbacon’s automatic investment calculator to or a return on investment calculator to monitor and predict your investment returns.

What investment vehicles are available in Canada?

There is a wide range of instruments that you can trade in Canada. Some bear high risks and promise high returns. As the common market saying goes, the higher the risk, the higher the return. You can freely choose one that suits your investment goals. Below is a quick view of the instruments and how they work.

Equities or stock trading

A stock refers to a financial instrument representing proportionate ownership and claim on an underlying company’s assets and earnings; these are also called shares. The two types are common and preferred stock. Common shares usually have voting rights as opposed to preferred shares. Preferred stockholders receive priority when dividends are paid and asset claims in the event of liquidation. Multiple companies list their stock to raise capital and increase their liquidity.

Institutional and individual investors come together to buy and sell shares in stock exchanges. While there are four exchanges in Canada, the Toronto Stock Exchange (TSX) is the major public platform where existing shareholders can transact with potential buyers. You should note that buying a stock on the stock market does not mean you buy directly from the company but an existing shareholder.

Stock advantages

What are some of the positives about investing in stocks? There are many, including a great tax rate on any capital gains. In fact, if you sell a share at a profit or capital gain, you are only taxed on half of the gain. But what other advantages are there to buying stocks?

• You can generate massive wealth. The stock market, over a long period, has averaged an annual gain of around 10% over long periods. 
• The stock markets trade in different kinds of stock tied to a range of corporations from other industries, both new and established.
• You can start with very little money. You can begin by saving up a little of your active earnings over a given period, then invest in a few shares of stock. Continued investment will automatically grow the size of your investment.
• You get to stay ahead of inflation as you grow your assets. The gap between the average annual returns of 10% for stocks and 3% for inflation prevents investors from losing purchasing power.
• High liquidity for some stocks. The stock market operates on weekdays and allows you to buy or sell stock throughout the trading day.

However, you must be cautious and patient when investing in stock since returns are not guaranteed. It may take longer for the money to grow; the stock market is volatile, meaning plenty of bubbles and crashes along the way. It would help if you also were mentally prepared for the possibility of losing some money due to mistakes made when investing. You should also be careful how you evaluate the share that you want to buy. It is important to know about a stock’s fundamental analysis.

Fractional shares

Fractional shares are portions of the whole share of a company’s stock. They enable you to specify the amount of money you want to invest in a particular firm. For instance, If you’re going to invest in a stock with a $100 share price yet you only have $20, you can buy one-fifth of a share of the stock from a broker who offers fractional shares. Not every brokerage lets you buy fractional shares, but you can use Wealthsimple or buy a Canadian Depository Receipt on the NEO stock exchange.

Fractional shares enable you to purchase a balance of any publicly traded business, including mega-companies in Canada that trade thousands of dollars per share. They also provide diversification at a lower cost. You can subdivide your small amount of money and invest in several portions of stock in different industries.

Dividends

Dividends are paid to shareholders in companies that declare and pay a dividend. A dividend is a portion of the after-tax profit distributed to shareholders of stock or of a dividend-based mutual fund; we’ll talk about mutual funds later. Dividends are income. They can be reinvested through dividend reinvestment plan (DRIPs). Dividend income is taxed differently than other assets, and benefit from a tax credit.

Exchange-traded funds

An exchange–traded fund (ETF) refers to an investment fund composed of a basket of securities that can be bought and sold at market-determined prices all day long. They are tailored to meet particular investment objectives. The majority of ETFs have securities that mirror the market index they are designed to track and whose returns they tempt to duplicate. In Canada, they were first created in 1990 and are relatively new compared to bonds and stocks. Most investors prefer ETFs due to their liquidity, low-fee status and diversification potential.

Types of ETFs

An ETF can hold various asset classes, including stocks, bonds, foreign currencies, commodities, etc. There are numerous ETFs available for investors to choose from. They are categorized based on the asset classes of securities they hold, asset-class size, industry sector, investing management style, and use of derivatives. 

Index ETFs

These are ETFs designed to track the performance of a market index. It can be a broad one or a sector-specific index. They utilize a passive investing style, often done by algorithms, and holding securities representative of their benchmark index like the S&P 500.

Actively managed ETFs

Opposed to Index ETFs, actively managed ETFs attempt to outdo the market by actively picking selecting securities that are projected to perform well. Their Management Expense Ratio (MER) tends to be higher than Index ETFs due to active management.

Sector-specific ETFs

These are ETFs engineered to expose investors to particular industry sectors such as financials, telecommunications, oil and gas, healthcare, and real estate.

Fixed income ETFs

These track sector-specific bond indexes and strive to reproduce their performance.

Equity ETFs

These are ETFs specifically designed to track stock indices.

International ETFs

These expose you to the bond and stock market at the international level.

Currency ETFs

These may track single or multiple-currency indices.

Commodity ETFs 

They expose potential investors to the commodity markets by buying physical commodities like gold, corn, cotton, wheat, sugar and investing in equities of companies directly involved with these commodities, such as manufacturers.

Leveraged ETFs

These ETFs strive to surpass, double or even triple the performance of the specific index they are tracking. They employ derivatives and debt to propel returns and are therefore considered complex and speculative investments. The fact that they a lot of active trading is employed makes them a little expensive in fees. 

Inverse ETF 

An inverse ETF is tailored to move the reverse of the index it is tracking. For instance, if the benchmark index drops by 7%, the inverse ETF should rise by 7%, and vice-versa. They also use complex instruments, and derivatives. ETFs generally have tax efficiency, diversification, and transparency advantages.

Mutual funds 

A mutual fund refers to a basket of financial instruments that are actively managed by fund managers. The fund managers conduct intensive market research and analysis and then decide on the right investments to cast the investor’s funds. The managers aim to make capital gains for the investors. 

Mutual funds allow individual investors access to professionally managed portfolios of bonds, equity and other securities. Each shareholder is hence proportionally involved in the gains and losses of the underlying fund. A change in the total market cap of the fund, generated by aggregating the performance of underlying investments, gives the merit of the fund. Your budget, timeline and profit goal specifications will determine the best mutual fund for you. There are many advantages to mutual funds.

• Advanced portfolio management. You will pay a management fee as part of your expense ratio when you buy a mutual fund. The small fee is used to hire professional portfolio managers who trade in securities on your behalf. 
• Risk reduction. The diversification aspect is achieved when mutual funds invest in a wide range of assets, and asset classes immensely reduce the risk portfolio. Many stock index mutual funds hold 1,000 or more individual stock positions.
• Reinvestment of dividends. Dividends and income from other sources declared for the firm can be reinvested in more securities, thereby growing your investment. 
• Convenience and fair pricing. Mutual funds are pretty easy to understand and to buy. The fact they are only traded once per day at the closing Net Asset Value eliminates price volatility and additional arbitrage opportunities exercised by daily traders.

You should pay close attention to a mutual fund’s management expense ratio and sales charges before committing your money. You should conduct thorough due diligence.

Bonds

A bond is an investment security where an investor lends money to a government or company for a given period in exchange for subsequent interest payments. The bond issuer eventually returns the principal amount to the investor at maturity. Bonds generally have lower volatility, hence viewed as a safer investment than stocks.

Bonds have fixed interest payments. Most countries provide legal protection for bondholders in the event of a company’s bankruptcy; they receive recovery amounts back. Bonds are often liquid. It is relatively easy for a company to sell a large number of bonds without affecting prices significantly. Some of the most common types of bonds are below.

Corporate bonds

Bonds are issued by corporations, limited liability companies, partnerships, and other commercial entities to raise capital for expansion, fund day-to-day operations, fuel research, or purchase new acquisitions. They are subject to federal and other taxes. These bonds are classified according to their maturity:

• Short-term bonds have five years or less to maturity.
• Intermediate bonds have a maturity between five to 12 years.
• Long-term bonds have 12 and above years to maturity. 

Sovereign government bonds 

They are known as Canadian Treasury Bonds in Canada, tradable fixed-income bonds fully backed by the faith and credit of the national treasury. They bear low risk and relatively advanced low returns to investors.

Municipal bonds 

These are securities issued by municipalities and local governments with specific project goals. You may be exempted from paying taxes depending on your country and location. 

Agency bonds

These are bonds issued by different government agencies. They may offer slightly higher returns than treasury bonds since they are a little less liquid. 

Cryptocurrency

Cryptocurrency, like Bitcoin, is a type of digital currency that only exists online and uses peer-to-peer technology to operate. It can be used both as an investment and a payment mode in certain circumstances, just like government-issued fiat currencies. It eliminates intermediaries and keeps transactions safe through blockchain technology.

Bitcoins have shown immense dominance over the past few years in terms of profitability. It recorded a staggering 300% over one year, topping the 31% gains for the S&P 500 and 40% for the S&P/TSX Composite Index, simultaneously in 2021. Fears of continually rising inflation have steamed Bitcoin’s appeal.

Some investors with a given risk appetite substitute gold investment with Bitcoin. They view it as a safe hedge for inflation. You can trade cryptocurrencies on platforms like Bitbuy, VirgoCX, and many other regulated and reputable crypto exchanges.

Derivatives

A derivative contract is one between two or more parties where the value of the derivative is based upon an underlying asset. The underlying instrument may be a stock, commodity or currency. Derivatives can be traded over the counter or in an exchange, implying trading through a decentralized dealer network. 

Derivative trading refers to when traders speculate about future price movements of the underlying asset through buying or selling derivative contracts to achieve immense returns compared with outright buying of the investment. Traders use derivatives for hedging purposes to attenuate risk against an existing position. Derivative trading enables a trader to go short and make gains on falling asset prices, thereby hedging against existing long positions. 

You can trade by leveraging on derivatives by entering into a buy or sell position and speculating which way the prices will shift using a reasonably small deposit. Leveraging will magnify the resulting profits or losses in contrast with buying the underlying asset outright. You should be wary of risks associated with trading in derivatives, such as short-term unfavourable market fluctuations. It is essential to have a trading strategy in advance and familiarize yourself with the stop-loss order approach.

Types of derivatives to trade

There are several derivative products to trade in Canada, namely spread betting, contracts for difference (CFD), forwards, futures and options. 

Spread betting

It is a way of speculating on the price movement of financial instruments such as commodities, indices, foreign currencies and shares. Traders bet on the direction of price movements for the underlying asset without actually purchasing and taking ownership. If the expectation is a rise in the asset’s value, a trader may decide to buy, and go long. If you predict a fall in the price, then you may decide to sell, or go short. Profits or losses are made depending on the direction of the price movement. The trader gains their stake multiplied by the number of correctly predicted points in the event of correct prediction. 

CFD trading

A contract for difference (CFD) is a leveraged type of derivative that enables financial instrument traders to speculate on short-term price shifts. It is a contract between two parties to swap the opening and closing prices of an underlying financial asset at the contract’s maturity. You do not own the asset. Instead, you instead trade a given number of units of a particular instrument according to the direction of your predicted price movement. You gain multiples of the number of CFD units bought or sold for each point you made the right trade. On the contrary, you make a loss when the price shifts against your prediction. 

Options and futures

An option is a contract between two parties that gives the buyer the right but not the obligation to trade in assets on or before the specified date. There are two types: call options and put options. A call option gives the option holder the right, but not the obligation, to buy a financial instrument at a specified price within the stated period. Options can be traded on many underlying instruments, including stocks, commodities, ETFs and indices. Forex options are specific to currency pairs and are directly affected by factors like interest rates, geopolitics and inflation expectations. 

Future trading refers to an agreement between two parties to trade an asset in the future at a specified date and time.  One party is obligated to buy the asset at contract maturity. The other party is obligated to produce the asset.

How to access the markets

There are several ways you can start investing in securities in Canada including the use of robo-advisors, online brokers and financial advisors. 

Using a robo-advisor

You have a lot of choices in robo-advisors in Canada. Robo-advisors offer ETFs and have low fees. Robo-advisors are investment platforms made of sophisticated algorithms engineered to invest for you based on your risk tolerance. They automate the entire investment process. Don’t be fooled by all the technology; there are still investment professionals working hard at growing your money.

You provide information about your income, financial objectives, and risk tolerance when you open an account. The advisor will then combine the provided information to build an investment profile to achieve your goals. All you need to do is deposit money into the account to flag off the investment process.

They include Wealthsimple, Nestwealth, Wealthbar, Justwealth, ModernAdvisor, and BMO Smartfolio, among others. 

Using online brokers

An online brokerage platform allows you to trade your stock, mutual fund, bonds, derivatives and other assets; it just depends on which brokerage you choose. Some, like the National Bank, are very sophisticated and have research and tools to help. You get to exert more control on your investments, buying and selling, depending on your assessment. Having robust knowledge of investing can be a significant boost since you don’t employ professional services for most parts of the investment horizon. 

The advantage is that you get to save money and have a personal touch on the whole investment process. You should ensure the brokerage institution you are choosing is licensed as a securities broker in Canada and has a physical presence. The brokers are regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which is supervised by the Financial Institutions Supervisory Committee (FISC).

Popular online brokers include Qtrade, Questrade, BMO InvestorLine, TD Direct Investing, Interactive Brokers, National Bank, and Virtual Brokers.

Using a financial advisor

Financial advisors can give you top-level advice on investments. Financial advisors are experts and have robust experience in the investment world. You have an option of letting them do all the work as you stay hands-free.

With financial advisors, you are prioritized and can schedule meetings, and talk about your finances and plans with the person investing your money. You can find a good financial advisor through Google by checking on reviews. Usually, financial advisors have higher fees than online brokers and robo-advisors.

Investing procedures for different investments in Canada

There is a lot of investment opportunity in Canada. Now that you are familiar with the financial instruments available in Canada and how to access the market, let us summarize how to invest in a few selected instruments below. Most are available through online brokers.

How to invest in ETF in Canada

The three methods used to buy ETFs in Canada are an online trading platform, a robo-advisor and a financial advisor. 

As long as you have the correct documents, it is easy. Steps to follow when using a trading platform include:

1. Open an online brokerage account

Choose the best online broker or robo-advisor for you by comparing the fees involved and their convenience, then create an account with the selected option. You will likely need to provide a form of identification and answer some questions.

2. Research the type ETF you want to buy

You have a choice of risk portfolios and sectors that you can invest in.

3. Fund your account

You can link the brokerage account to your bank account and initiate the flow of cash.

4. Buy the ETF

Decide on what ETF you want to buy, select the number of shares, place the buy order and wait for notification.

How to invest in stocks in Canada

So, you are ready to buy stocks. As long as you have the correct documents, like identification, and answer certain questions, should be easy. The following steps will help you when investing in stocks.

1. Open an Online Brokerage Account

After selecting an online brokerage institution, create your account and provide the required information.

2. Choose your investing approach

You can pick one among index investing, dividend investing, or growth investing.

3. Research stocks to buy

Conduct a prolific due diligence on investment aspects like prices, dividends, market trends, and performance. Online brokers like National Bank , Qtrade, and RBC Direct Investing, have great research tools.

4. Fund your account 

You need money to initiate the investment. You can deposit money in the event account and even schedule a monthly contribution.

How to invest in mutual funds in Canada

Here are the five key steps to use when buying mutual funds in Canada. Like with other investments, you will have to provide identification and answer some questions. You should decide on the amount to invest and the period of investment. Having clear financial goals is important and helps you plan adequately.

1. Open an online brokerage account or an account with a financial advisor

As discussed, you can buy mutual funds with a financial advisor who will give you advice, or through an online broker.

2. Choose the type of fund to invest in

Your ability and willingness to tolerate risk play a major role in selecting the type of investment to cast your money.

3. Compare fees and performance

Some mutual funds have higher fees. You need to understand the fees, compare them with similar funds and evaluate their merits before investing. You can calculate the impact of fees with this online calculator.

4. Choose a  mutual fund company

Ensure the company you are buying mutual funds from is registered by conducting due diligence. There are a lot of name-brand mutual fund providers like Fidelity and Vanguard; there are also funds that are managed by Canadian financial institutions like BMO. You can find information about the funds where you purchase them.

5. Complete the application and buy the funds 

After providing personal information and consent about mutual fund investment, you can close the deal by purchasing the funds.

How to invest in bonds in Canada

There are two major ways of buying bonds in Canada: you can purchase a bond through a financial broker or purchase a bond fund via your brokerage account. Purchasing a bond fund through a bond ETF is one of the best ways to invest in bonds. The bond ETF may have short-term, long-term or combine both. You can also invest in a broad market bond fund that incorporates local and international bonds with varying terms. All you need to do is create a brokerage account or robo-advisor account, and select the ETF and purchase the number of shares you want during trading hours. 

How to invest in cryptocurrency in Canada

The top cryptocurrency exchanges for Canadians include Coinbase, Bitbuy, MyBTC, NDAX, Coinsmart, VirgoCX, Shakepay and others.You can compare all of them with a cryptocurrency comparison tool.

The steps to buying cryptocurrency are:

• Choose a hot or cold storage wallet. Cold storage wallets operate offline, making them inaccessible to hackers, hence safer to store your cryptocurrency. You connect them to your computer by USB.
• Select a cryptocurrency exchange to buy your virtual currency from.
• Advance all the required information and documentation regarding your identity, residence and any other.
• Once your identity is verified, you have the go-ahead to purchase bitcoins and any other cryptocurrency.

With the above information, you can adequately choose the best investment that suits your financial goals and adheres to your risk tolerance. The best time to start investing is today. Why wait? Good luck investing!