guide to investing for beginners, robo-advising, robo-advisor, calculation, calculating, paperwork

How to Start Investing in Canada: Everything You Need (2021)

So here you are. You’re wondering how to start investing in Canada because you are curious.

Maybe instead, you’re looking to invest in “stonks,” particularly with GameStonk.

Well, whatever your preference, I will take you through how to open an investment account, what investment accounts you can open, some tips on investing, and more.

Without further ado, let’s get started.

Note: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “How To Start Investing In Canada: Everything You Need (2021)” serves as educational content, not investing advice.

How to Open an Investment Account:

Courtesy of Mike Lawrence on Flickr. Click here for the link to the photo. Click here for Mike’s blog. No changes made to the photo.

First, I should mention that this guide to learn about investing in the stock market briefly walks through setting up an investment account with Wealthsimple Trade. I credit Wealthsimple Trade as one of the best investment apps for beginners because of its ease of use and no commission fees.

However, there are other online brokers, like Questrade or Scotia iTrade. Each is available to individuals in Canada and people to open an account and have financial advisors who will help you achieve your financial goals.

It is best that before opening an investment account with a brokerage to learn about the features their investment accounts provide.

Or if you prefer paying a lower fee, you can use various discount brokerages, but keep in mind, they are not necessarily financial advisors and may be concerned soley with executing trades, not helping you plan your investment goals.

Wealthsimple Trade:

Let me state it clearly as well. I am not affiliated with Wealthsimple Trade.

Wealthsimple Trade is primarily focused within Canada, so if you are outside of Canada, there are various other brokerages you can choose from.

If you are Canadian, you are more than welcome to use a different brokerage instead, as the steps to open one are more than likely similar to that of Wealthsimple Trade’s.

First, you will want to sign up under Wealthsimple’s website, which you can click on the link above to be navigated to.

You will need to fill out an application to open an account, providing some necessary information, and agreeing to terms and conditions.

After you have filled in all of the necessary information, you will need to verify your banking information, which can be done by uploading a bank statement or even providing some information relating to your bank account.

Once you have completed that step, all you need to do is wait a while to review the information and open your account.

If you run into any technical difficulties while filling out the application or are concerned with the application process, you can consult and contact the Wealthsimple help center.

Are There any Initial Requirements or Costs to Open an Account?

This answer depends on which broker you want to open an account with.

I state that Wealthsimple is one of the best investment apps for beginners additionally because of its minimal startup requirements. You don’t need to deposit a minimum amount of money to start trading. You can start trading with $1 or more.

However, if you are going to use a broker such as Questrade they require individuals to make a minimum deposit of $1,000 to start trading.

The most basic requirements to open an account would be to have a SIN (social identification number) and a bank account. Still, each broker may have additional requirements, another reason for you to do more research on your interested brokerages.

What Type of Account Should I Open?

All right, so you’re still wondering how to invest money into the stock market. However, you’re faced with a choice, what account do you open?

Well, it depends.

Ultimately for Canadians, this account can come down to a battle between TFSA vs. RRSP.

I will provide a little bit of information on both.

TFSA:

A best way to use a TFSA is to purchase a stock, mutual fund, index fund, or any other type of security.

A TFSA (tax free savings account) is primarily used to avoid paying taxes on investments and is available for those who are 18 and have a social insurance number (SIN). Any amount that is deposited into a TFSA, as well as any income earned through the TFSA, is typically tax-free.

Under this method, any gains you make on your investments will generally be tax free.

This sounds wonderful. It is wonderful. But how much can I have in my TFSA?

The catch is there’s a set limit provided each year, meaning that you can only invest that set limit for the year.

If you have not heard recently, the Canadian government has set the 2021 TFSA limit of $6,000.

Therefore, you can invest no more than $6,000 for 2021.

However, if you have any uncontributed room from previous years, you can add this to the 2021 total of $6,000.

Calculation:

tfsa contribution room

This is Serge.

Serge was born on January 1, 2000. Meaning now Serge is 21, and Serge, maybe similar to you, has not opened a TFSA in the past. Therefore, as we can see from the picture above, he has a total contribution room of $23,500 and can contribute up to this amount, not just the $6,000 for 2021.

When Serge had invested this year in stocks, he made a 100% return on his $23,500 investment. So now, Serge has a total of $47,000 in his TFSA (original contribution of $23,500 + $23,500 gain).

Serge does not have to pay any amount into tax for this year.

I hope that clarifies your understanding of what a TFSA is, and it’s just basic information.

How to Invest the TFSA in Stocks:

You would invest in stocks with your TFSA just as you would with any other type of investment account.

However, it should be noted that you may need to pay taxes from your TFSA.

In some cases, you will need to pay taxes. For example, if Serge contributed $25,000, not $23,500, he would be taxed on the over-contribution of $1,500 ($25,000 – $23,500).

For a list of tax payables relating to TFSAs not discussed, click here.

RRSP:

An RRSP (registered retirement savings plan or you may have heard it as just registered retirement savings) allows individuals to contribute pre-tax dollars into this account and earn gains tax-free. Whenever it is time to withdraw from the RRSP, individuals are then taxed on the amount of their withdrawal.

So, if you are going to be taxed on the RRSP, what makes it so better than a TFSA?

There are certain advantages to an RRSP, one being that you can potentially contribute more in an RRSP than in a TFSA.

How much can I contribute to my RRSP?

With an RRSP, there is a different limit from an RRSP. The limit is based on your earned income. Earned income is income such as employment income, net business income, or royalty income.

The RRSP limit is calculated by taking the earned income and multiplying it by a rate of 18%.

All together, how does an RRSP work?

I’ll give another example.

Calculation:

Here we have Serge again. He’s very popular.

In the first example, Serge has an earned income of $100,000 through his employment as a bank teller.

Serge’s limit is the lesser of either:

  • Earned income x 18%
  • RRSP 2020 limit of $27,830

As illustrated in the picture, Serge’s limit, for example 1, is $18,000 for 2020.

However, in example 2, we see the 2020 limit that equals Serge’s RRSP limit. This is because there is a set limit the Canadian government enforces yearly. For 2021, it is now $27,830.

Any time that the 18% of earned income exceeds the limit, an individual’s limit will be the yearly limit enforced by the government.

There is an overcontribution cushion of $2,000. So, if Serge contributed $20,000 instead of $18,000 in the first example, he would generally not owe any taxes for the $2,000 ($20,000 – $18,000) overcontribution.

However, any amounts above the cushion are taxed immediately.

I hope that isn’t confusing at all.

Like TFSAs, if there is any unused contribution room from previous years, additional contributions can be made, similar to the example under the TFSA section.

For more information on RRSPs and where you can locate available contribution room, click here.

Neither of these accounts is designed for constant withdrawals but to invest your money for the long-term.

The minute you take money out of an RRSP, you are taxed on the income earned. Even if you are not taxed on your withdrawals from a TFSA, your contribution room does not reset for the year.

Other Accounts:

There are various other accounts you can open for investing money into the stock market that I will not include great detail about.

Some accounts, such as a non-registered account or RESP (registered education savings plan), can be opened and are offered by various brokers.

However, it is crucial to check into each account’s features to understand better how they serve your needs. Not all accounts will have features as the TFSA and RRSP does.

If you open a non-registered account, for example, you will be taxed on the gains and income from when you have finally have learned how to invest in shares.

I will leave a link to the accounts you can open with Wealthsimple here. However, look around to other various brokers and see what other accounts they offer in addition to Wealthsimple.

Robo Advising:

Courtesy of Robin Zebrowski on Flickr. Click here to view the picture, No changes were made.

I feel it is vital for me to briefly discuss robo-advising because you may not entirely be looking how to start investing in Canada directly.

You’re not even looking at how to buy stocks directly.

Instead, you want to know how to start investing passively. And what I mean by passively is by having someone or something else investing for you.

This is the beauty of using a robo-adviser because it will invest however much you want into the market.

Many brokerages in Canada, such as Wealthsimple and Questrade, offer these sorts of services, but it should be noted that it comes at a fee. Usually, as a certain management fee taken out of your collection of stocks.

How does it work? Why would I rather have something invest for me instead of learning how to invest money myself?

Well, using a robo-adviser will save you a tremendous amount of time. Instead of looking through charts or pages of stocks, you just set up some information, and the system will choose stocks for you based on your preference.

By preference, I mean that you can choose an investment style. For example, you will commonly see investment styles based on high-growth, conservative growth, or retirement.

Based on your risk tolerance level, the system serves to fulfill your needs to achieve your goals.

If you feel as if you would prefer robo-advising over being active in your investing, check out the various platforms that offer these services. The process of a robo-adviser account is similar to opening an investment account. Scroll to the top for a reminder of that process.

What you can Purchase Through an Investment Account:

Stocks:

I am sure you do not need an introduction to what stocks are.

Just for a brief overview, they are equity securities issued by a company that grants you part ownership. The ownership per stock is probably like 0.0000000000005% of the company, but you do own a part of it!

Through Canadian brokers, you will be able to purchase stocks from companies on the TSX, known as the Toronto Stock Exchange.

However, some brokers will also let you purchase from other markets in foreign countries, such as the U.S., European, or Asian markets, if you rather not purchase from Canadian companies.

If you are purchasing a stock from another country’s stock exchange, you will likely be charged a currency exchange fee. The fee is based on exchanging from one currency (CAD$ in this case) to another (USD$, for example). Brokers like Wealthsimple, which offers $0 commission fee trading, will use the exchange rate fee to earn money.

Brokerages typically add a 2% fee on top of the currency conversion, according to Wealthsimple. Again, this is how they make their money with $0 commission trading.

Individual companies will also offer dividends. Now you may have heard of dividends before, but as a common term or used in a phrase. Dividends are essentially cash payments to shareholders of companies as a service for buying their stock.

How much money do you get? Well, CIBC’s board of directors declared that shareholders would be paid a dividend of $1.46 per share.

Different companies pay different rates, but not all companies will pay a dividend, so if you’re interested in dividend stocks, pay attention to the dividend per share information provided.

Bonds:

Now that we have briefly talked about stocks, did you know that investors are investing money into bonds? What are bonds?

Think of bonds as debt, and companies will list their debt on public markets for investors to purchase.

The reason behind this is companies need cash, similar to issuing stocks. It’s not the only reason, but it is a significant one.

Let’s look at an example.

Calculation 1: Discount Value of Bond

discount bond calculation

When buying a bond, an investor will purchase a bond at its market value (what it’s listed as) and bonds typically have a face value of $1,000. For Serge, he purchases a bond in example 1 for $800 (market value). Since the $800 (market value) is lower than the $1,000 (face value), we call this a discount or discount bond.

On bonds, investors can earn interest, as we see Serge earning over the four years. Serge will also be paid the $200 ($1,000 face value – $800 market value) over the four years.

The maturity of the bond in the example is four years. Therefore, we can say it matures in 4 years.

Calculation 2: Par Value of Bond

par value bond calculation

In example 2, Serge purchases a bond for its face value, and we can say that Serge purchased the bond at par value. Therefore, Serge will not receive any payback at the bond but will receive a higher interest rate, which typically happens in purchasing a bond at par value, but not always.

Calculation 3: Premium Value of Bond

premium bond calculation

Lastly, in example 3, Serge purchases a bond at a market value much above the face value. We call this a premium or premium bond. Like in example 2, Serge will not receive any pack back of the bond but will receive a higher interest.

So, by the examples, the best bond to purchase it at a discount, right?

Well, my examples are just that, examples. IT DOES NOT mean you will get a bond for 3% interest regardless of bond type. You may do good to get a bond at 1.5%. Nor does it mean you will get a bond at $800; it might be $950; it depends on the market.

As well, bonds might be relatively safe, but it is not guaranteed you will receive the full amount expected. A bond may default, meaning that the issuer may not have the cash to make the necessary payments, and as a result, you could lose your investment.

That’s why you do your research and as well consult a financial advisor when needed. But for more information on bonds, check out Investopedia’s article on what to know about bonds.

ETFs:

One of my favourite investments is ETFs, known as exchange traded funds.

ETFs can provide a convenient way for investing with little money because several ETFs can cost you lower than $20.

An ETF is a holding of various companies’ shares. Think of instead of owning 0.0000000000005% in a company, you now own 0.0000000000000000000005% of not just one company, but multiple companies.

ETFs will hold fractions of shares in specific companies, depending on what the ETF is based on.

You can purchase ETFs based on growth or dividends. For example, there are thousands to buy. Some even track indexes, which are the S&P 500 or NASDAQ.

So, what’s the advantage to holding an ETF rather than a stock?

Diversification. Think of diversification as holding your eggs in more than just one basket.

Diversification Example:

diversification example

For another example, we have My ETF, not my own ETF, but you get it. It’s an ETF.

As we can see, eight companies are held in this ETF, with some significant fluctuation in returns.

This graph illustrates the importance of diversification as the last share in the holding hedged the enormous loss the first share experience throughout the year.

If an individual only held the first share, they would have suffered just the enormous loss, but since My ETF has other holdings, it prevented such a significant loss because of holding your eggs in more than only one basket.

While ETFs are great to hold, it does not mean that they will only reward you with positive returns. It depends on the performance of the company’s shares because in a given year like 2020 has been, investors can lose a significant amount of money in a short amount of time, regardless of the holdings.

ETFs usually come with a holding/management fee as well. I have seen fees ranging from 0.05% – 0.20%, but they can be higher or lower. It all depends on the institute offering it, so it is vital to look at this fee.

But another bright side to ETFs is that they will also pay out dividends from the shares it is holding, so the dividends can potentially pay off the holding/management fee.

You might also have heard or read about mutual funds. They are very similar to ETFs, typically they are managed by a person, and the holding/management fee associated with the mutual fund is higher than an ETF.

The difference between ETFs vs. mutual funds is that ETFs are typically more passively managed. In contrast, mutual funds are usually handled through a professional money manager, in addition to the difference in holding/management fees.

How am I Taxed on my Investments?

Let me use another example with our pal Serge.

taxable capital gain calculation

Serge, in 2020, invested $1,000 into the stock market.

By 2021, his investment is now worth $2,000.

The gain, which we call a capital gain, is $1,000, demonstrated in the graphic above.

Serge, like other individuals in Canada, is taxed on their capital gains. The amount they are taxed by is 50% of their capital gain.

Therefore, in this instance, Serge’s taxable capital gain is $500.

If Serge purchased stocks for $1,000 and had to pay a commission of $10, the capital gain would not be $990, and taxable capital gains would be $495.

The formula to calculate capital gain is the proceeds from your sale minus the cost of your investment.

Clear? Okay.

What happens if Serge suffered a $1,000 loss instead of a gain?

Then, serge has a capital loss of $1,000 and therefore is still “taxed” by 50% of his capital loss, so $500. However, instead, think of it as a deduction to Serge’s taxable income because that’s what it is.

You are also taxed on any dividends you earned. However, different factors affect the amount of tax it is subject to.

I know this is brief, but it’s essentially how taxes in the stock market typically work for the average investor.

How do I Buy Stocks in Canada and How do I Sell Them?

You can’t just buy stocks of Canada obviously, that would disrupt so many things.

What you will want to do is with your brokerage, search for the stock or security you want to invest money into.

Then, you will be able to select the number of stocks (or securities) you want and choose an order.

To quickly break down the orders:

  • Market order: This allows you to buy a security immediately at its stated price.
  • Limit order: This allows you to select a price to purchase a security at.
    • Just because you set a price possibly a couple of dollars below its worth does not mean you will get the security.
  • Stop-limit order: This allows you to select a price to purchase a security at, and once the security reaches that price, the order is placed immediately like a market order.

When selling shares, you can make a market order, limit order, or stop-limit order to sell and reverse the definitions of each for buying with selling.

Investor.gov has a great article explaining each order a little more. Just note that a stop-limit order is recognized as a stop-loss order on the article. 

You can cancel a limit order but cannot cancel a market order because when it is placed, it is automatically filled instantly.

If you try to buy or sell a stock whenever the market is not open, then the order will be fulfilled the next day the market is open. So typically, if you try to place an order on a Saturday, it will only be fulfilled on the following Monday, unless there is a holiday or other reason for a market’s closure.

Are There any Limits to Investing?

Courtesty of Martin Abegglen on Flickr. To view photo click here.

Not necessarily. You should be able to purchase and sell as many shares as you want to.

If you are going to buy a million shares of a company, well, you might want to research that one because I am unaware of the necessary steps.

Are there any penalties for selling a stock?

The only penalty that I would associate with investing, let alone stocks, is to overcontribute to an RRSP or TFSA.

But when you are selling a stock, you are worried about any gains or losses you would make with the sale.

You can hold a stock for however long you want, given that a stock isn’t going to be taken off an exchange permanently.

Important Investing Terms to Know:

There are specific terms you will need to know, and I wanted to cover them in my guide on how to start investing in Canada when I was planning to write it.

Let’s take a look at Amazon’s stock (ticker: AMZN) on Yahoo Finance, and I will point out a few things you should know:

  • Ticker: Companies listed on a stock exchange will usually have a ticker associated with a company’s name. Just look at Amazon’s above.
  • Portfolio: Collection of stocks, ETFs, bonds, or other securities.
  • Ask/Ask Price: The price you buy a stock or other security.
  • Bid/Bid Price: The price you sell a stock or other security.
  • Open/Open Price: The opening price of the stock at the market’s opening.
  • Market Opening/Closing: The market only opens for certain hours within a day. For the TSX, it begins at 8:00 A.M. and closes at 5:00 P.M. Also, the markets are closed on weekends and certain holidays.
  • Previous Close: The price the stock was at on the last day’s market close.
  • Risk Tolerance: The amount of risk you are willing to take/handle.
  • Market Cap: This is the market value of the company. It’s calculated by total shares outstanding x market price per share.
  • Beta: This is a ratio that tells you how volatile or risky the stock is.
    • A beta above one can represent a stock that fluctuates in price frequently and potentially harshly.
    • If the beta is 1 it represents a reasonably consistent stock.
    • But a beta below one is considered a safer stock. Its price does not frequently change.
  • Volume: Number of shares traded on either the previous day or the current day (depends on whether the stock market is open).

If you want me to talk about some of the financial ratios displayed on Yahoo Finance, leave a comment below.

Viewing Financial Ratios and Annual Reports:

However, you will also be able to look at a company’s revenue, cash, and other various financial facts on Yahoo Finance. If we look at Amazon and are not using the app, click under “statistics” to view the company’s financial statistics.

As a requirement for being listed on a public stock exchange, companies are required to publish annual reports, which cover various topics, including risk assessment, company overview, operational procedures, important news, and reasonably most important, their financial statements.

For Canadian companies, you can visit SEDAR and click on “search database” to view a company’s annual reports and various other filings,

For companies based in the United States, you can use SEC to view their public statements.

What to Know About Investing for Beginners: 

Investing seems very simple but it isn’t necessarily so. Every day, people will practically throw their money away because they do not necessarily know what they are doing.

As an individual starting on learning how to invest, I would recommend doing more research and learning more about the stock market, certain investment styles, and looking for great value stocks.

The stock market can be very similar to gambling if you do not understand what you are doing, and unfortunately, many people have lost an immense amount of money, and it does not take long to do so.

Investing can be fun, do not let me discourage you from that, but it takes a lot of self-discipline and time to get great at it.

You do not need much money to invest necessarily. You can start investing with little money. As I have mentioned, you can find individual shares or ETFs for cheap investments, but it is crucial to research the security first.

Another critical lesson is to not invest with your emotions. We all get caught up in our feelings at times, and we can even succumb to FOMO (fear of missing out) on a specific stock. I will admit, this has happened to me with Genius Brands International’s stock back in the summer of 2020, and the shares had severely declined, unfortunately, but it happens to the best of us. It is important to remember to build self-discipline.

Another important lesson that I must stress and highlight is that PAST RETURNS DO NOT GUARANTEE FUTURE RESULTS. You can view how a security has performed over the past number of years, months, or days. However, just because a stock earned a 20% return last year does not guarantee it will earn 20% this year.

Looking at the history and performance of a stock or other security can be an essential valuation tool of said security, but please do not buy into it solely because of the past performance.

How You Should Look at Returns:

One last tip that I will mention is that just because a stock has a high price does not necessarily mean it is an excellent investment. Let me give an illustration.

stock prices

Looking at this example, it’s pretty self-explanatory, but just because the price is high does not determine it’s the best investment to earn. As a result of investing more into Stock A, Serge can make $20 more in his investment account.

There are much more factors to investing that you may realize, and within due time, you might learn more about them, depending on if you want to be active in your investing or passive.

Concluding Remarks:

I hope that you can walk away with more knowledge on investing.

Always be due diligent and think twice before investing in something someone recommends to you, and learn more at your leisure.

I know for myself, it is important not to overthink investment decisions, and it can be essential to trust the instincts you are given because you might be right but might be wrong. You will not always make money off the stock market, there are days where you will lose more than you win, but it is apart of the experience of investing.

As well, investing over time can provide you higher returns than high interest savings accounts will.

Would you be interested in a comparison of average stock market returns versus those from interest rates? Let me know below.

Speaking on investment types, real estate returns may beat out returns from the stock market due to the high apprecaiting real estate asset classes there are.

However, the stock market to some is consdidered the best place to invest money in Canada, and it sure is one of, if not the best in my opinion.

If you want me to talk more about financial ratios, the different investment styles you can choose from, or another topic of your curiosity, leave a comment below or email me at [email protected].

You can also check out my various stock reviews here, and feel free to share this article on social media or with your friends to help spread this around to more people.

I appreciate you reading my guide on how to start investing in Canada and if you decide to start investing, I hope your investment portfolio grows substantially over time.

Again, I am not affiliated with Wealthsimple.

Disclaimer: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “How To Start Investing In Canada: Everything You Need (2021)” serves as educational content, not investing advice.

2 thoughts on “How to Start Investing in Canada: Everything You Need (2021)”

  1. 50% of taxes on capital gains is crazy. Now i see why people run to tfsa or rrsp. Has this always been the percentage on capital gains?

    Please do write an article on how we are taxed on dividend income and their types.

    Are we also taxed on bonds, and etfs too?
    Lastly, what is yield Ratio?

    1. Hey Godwin thanks for the comment!

      Those are great questions, let me briefly answer them.

      – As far as I know, the 50% tax for capital gains has been around for a long time.

      – In other countries, like the U.S., may have different rates depending on certain factors.

      – You are also taxed on income and gains from bonds, as well as ETFs. Any interest, dividends, and capital gains are subject to tax if you hold an unregistered account.

      – A yield ratio is also how much security pays a dividend.

      – For example, if Serge inc. is a company with shares listed on exchanges, has a price of $100 per share, and a yield of 4%, the company pays a dividend of $4 per share (4% yield x share price of $100).

      I’ll work on your article within a short while and will personally notify you when live.

      Hope this clarifies everything!

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