Skip to main content

Getting Started with Investing FAQ

Getting Started with Investing

Ready to invest but not sure where to begin? This section walks you through the steps, from choosing an amount to invest to understanding transaction fees and fractional shares.

 Questions Covered:

When should I start investing?

How do I get started investing in publicly traded companies?

But I don’t know how to get started

How much money should I expect to invest to start?

What about fractional shares?

What about transaction fees?

Explore More Investing FAQs:

Questions

When should I start investing?

If you are not already investing your money, the best time to start is now! However, before diving in, make sure you have a stable financial foundation. This means having an emergency fund, being free of high-interest debt, and understanding your financial goals and risk tolerance. Once you are financially stable, the best time to start investing is as early as possible. Now, let us take a look at why starting early is so crucial:

  1. Compound Interest: The earlier you start, the more time your investments have to grow. Compound interest can significantly boost your wealth over time, as you earn returns on your returns.
  2. Learning Curve: Investing is a skill that improves with experience. Starting early allows you to learn from mistakes and successes, refine your strategies, and build confidence.
  3. Risk Tolerance: Younger investors typically have a higher risk tolerance because they have more time to recover from potential losses. This allows for more aggressive investment strategies that can lead to higher returns.
  4. Financial Goals: Early investing helps you work towards long-term financial goals, such as retirement, buying a home, or funding education.
  5. Habit Formation: Starting early helps you develop good financial habits, such as regular saving and investing, budgeting, and financial planning.

To illustrate the power of early investing, consider the following example:

Marie starts investing at age 20, investing $2,400 annually at the beginning of each year. Life starts to ‘happen’ at 30, so she stops contributing at age 30. Meanwhile, John starts to ‘enjoy life’ at 20 but when he turns 40, he starts to think he should plan for his future, so he invests $4,800 at the start of every year until he reaches 65. Both assume an 8% annual growth rate (The historical average growth rate of the S&P 500 is around 10.26% but let us be conservative). Who will have the larger retirement nest egg at 65?

Marie John
Age Amt invested YE Value Age Amt invested YE Value
20 $ 2,400 $ 2,592 40 $ 4,800 $ 5,184
21 $ 2,400 $ 5,391 41 $ 4,800 $ 10,783
22 $ 2,400 $ 8,415 42 $ 4,800 $ 16,829
23 $ 2,400 $ 11,680 43 $ 4,800 $ 23,360
24 $ 2,400 $ 15,206 44 $ 4,800 $ 30,412
25 $ 2,400 $ 19,015 45 $ 4,800 $ 38,029
26 $ 2,400 $ 23,128 46 $ 4,800 $ 46,256
27 $ 2,400 $ 27,570 47 $ 4,800 $ 55,140
28 $ 2,400 $ 32,368 48 $ 4,800 $ 64,735
29 $ 2,400 $ 37,549 49 $ 4,800 $ 75,098
30 $ 2,400 $ 43,145 50 $ 4,800 $ 86,290
Stops contributing at 30 Contributes for another 15 years
65 $ – $ 637,915 65 $ 4,800 $ 414,484

Table A: The long-term impact of compounding.

Over 11 years, Marie invests a total of $26,400 (11 x $2,400) and ends up with a nest egg of $637,915. John, on the other hand, invests a total of $124,800 over 26 years (26 x $4,800) and accumulates $414,484. Despite investing more than twice as much, John’s nest egg is almost 54% less than Marie’s, highlighting the power of compounding.

It is pretty obvious that the earlier you jump into investing, the better. Think of it like laying the foundation for a sturdy financial future. By starting early, you give your money more time to grow and multiply. So, do not wait around—get started as soon as you can, and let your money start doing the heavy lifting for your financial goals! 😊

Cautionary note: The downside of compound interest

Just as compound interest can grow your savings, it can also work against you when paying off debt. Some credit cards compound interest daily on your balance, leading to higher interest amounts if you carry a balance month-to-month. Therefore, it is essential to pay off debt as quickly as possible.

Return to Question Covered

How do I get started investing in publicly traded companies?

First, ensure you have the basics covered: set aside an emergency fund, pay off high-interest debt, create an investment plan, and consult with a certified financial planner to ensure everything is in order. Once these steps are completed, you are ready to dive into investing! The first step is to open an investment account, which allows you to buy and sell shares, effectively making you a part-owner of those companies. 😊 Investment accounts can hold cash and a variety of investment products, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This gives you the flexibility to choose investments that align with your risk tolerance and financial goals.

Step 1: Open an Investment Account Consider using a no-cost trading app like TD Easy Trade or Wealthsimple. For Canadians, you will receive both a Cash account and a Tax-Free Savings Account (TFSA), each with Canadian and US dollar subaccounts. TFSAs are a great way to grow your wealth tax free because any interest, dividends, or capital gains earned in a TFSA are not subject to Canadian income tax. Additionally, withdrawals from a TFSA are not taxed, offering flexibility as you can access your funds without worrying about additional tax implications. Remember, there is an annual contribution limit for TFSAs, so check with a financial advisor or the Canada Revenue Agency (CRA).

Step 2: Choose Your Platform Back in the early 90s, investing meant calling a stockbroker, buying shares in lots of 100, and paying a $50 transaction fee. Today, online trading is much more accessible. Fees are minimal, if not free, and you can buy as little as one share, or a fraction of a share in some cases. All you need is either a computer with secure, fast internet access or a smartphone with an appropriate app. Here are some well-known online brokers:

  • Big 5 Canadian Banks: RBC Direct Investing, Scotia i-Trade, TD Direct Investing, BMO InvestorLine, CIBC Investors Edge
  • Third-Party Platforms: Questrade, Qtrade, Wealthsimple

Many banks require a minimum balance to avoid maintenance fees, but these fees are often waived if you or your household have a substantial financial relationship with the bank (e.g., mortgage, savings account, etc.). Using your financial institution for your trading account simplifies money transfers and usually they offer comprehensive financial planning services to assist with overall wealth management. In addition to cash, and TFSA accounts, many financial institutions can also provide tax sheltered Registered Retirement Savings Plan (RRSP) or Registered Income Fund (RIF) accounts in both Canadian and US currencies. Additionally, you can buy and sell on major Canadian and US exchanges, as well as secondary exchanges like the Canadian Securities Exchange (CSE) and the Over-the-Counter Market (OTCM) in the US. If you are opening your first direct trading account, consider starting with your financial institution for these conveniences.

Step 3: Determine Your Needs If you do not meet the bank’s fee waiver criteria, explore other trading platforms. Consider what is important to you:

  • Research capabilities to look for investments or perform your own due diligence on companies
  • Low transaction fees
  • Access to all North American stock markets and stocks
  • Educational resources to help you understand this investing thing
  • Customer support and the ability to easily talk to someone if you have any questions

Assess your investing knowledge, experience, and desired features, then choose the platform that fits you best.

Happy investing! Remember, the key is to understand what you are investing in and make decisions that align with your financial goals and ability to take on risk.

Return to Question Covered

 But I don’t know how to get started

If you are unsure how to get started investing, do not worry—most Canadian banks offer their own direct investing online services. Using your financial institution’s service is convenient and allows you to manage all your finances under one roof. While there are likely to be trading fees (check with a tax specialist to see if they are tax-deductible), the benefits include comprehensive tax documents, record keeping, access to research, instant currency transfers, and seamless transfers between your investment and bank accounts. Additionally, your bank can help you set up your direct trading account, link it to your designated bank account, and assist with your initial money transfer into the investment account.

If your financial institution charges a monthly fee and transaction fees, consider third-party investing platforms like Wealthsimple or Easy Trade.

When applying for a direct trading account, request six sub-accounts to be set up if possible. You may not need all of them initially but having them ready can save you from paperwork later. Here is a breakdown of the sub-accounts you should consider:

  • Cash Accounts: Ensure you have enough funds in your cash account to fully pay for any stock, ETF, or mutual fund before placing a buy order. You will need a Canadian dollar account for trades on Canadian exchanges and a US dollar account for trades on US exchanges or Canadian stocks that trade in US dollars.
  • Tax-Free Savings Account (TFSA): Investment earnings in a TFSA are not taxed, and withdrawals are tax-free. However, there is an annual contribution limit and penalties for overcontribution. Additionally, if an investment loses money, there is no capital loss deduction (tax deduction). However, no one makes investments with the intention to lose money 😊. Like the cash account, you will need both a Canadian dollar and a US dollar TFSA for respective trades. Consult with a financial advisor or tax specialist to determine your contribution limits and how to maximize your TFSA.
  • Registered Retirement Savings Plan (RRSP): This account allows you to save for retirement by deferring taxes until withdrawal. Ideally, you will not access these funds until retirement when you might be in a lower tax bracket. Early withdrawals are taxed, and there are annual contribution limits to consider. As with a TFSA, there is an annual contribution limit and penalties for overcontribution. Once again, you will want both a Canadian and US dollar RRSP accounts for trades in the respective currencies.
  • Registered Retirement Income Fund (RRIF): Let me start by saying I haven’t reached this stage yet, so I don’t have firsthand experience with RRIFs. You should consult with a financial advisor or tax specialist to ensure you’re making the best decisions for your specific situation.

By the end of the year you turn 71, you’ll need to convert your RRSP into a RRIF. Once it’s converted, you’ll begin making mandatory withdrawals the following year, which are considered taxable income. The advantage of a RRIF is that your investments can remain in the account, continuing to grow while providing a steady stream of income during retirement. However, unlike an RRSP, you can no longer contribute to a RRIF, and you’re required to withdraw a minimum amount annually, as determined by the Canada Revenue Agency (CRA).

It’s also important to remember that if you have both Canadian and American RRSP accounts, they should be converted into matching Canadian and American RRIF accounts to keep everything aligned as you transition into retirement.

Note: You can have either an RRSP or an RRIF, but not both simultaneously. Be sure to consult with a financial advisor or tax specialist.

With these accounts, you should end up with the following six sub-accounts within your direct trading account:

  1. Canadian Cash account
  2. US Cash account
  3. Canadian TFSA account
  4. US TFSA account
  5. Canadian RSP/RIF account
  6. US RSP/RIF account

Now that your accounts are set up, you are ready to start buying and selling shares. Your first trade will likely be in one of your cash accounts, but if you have room in your TFSA, consider transferring funds into your TFSA to make your first trade. Keep in mind that trades in cash accounts can trigger taxes, while trades within a TFSA are tax-free.

For example, if you buy 100 shares of ABC company at $10/share, investing $1,000, and the shares rise to $100/share in two years, your investment will be worth $10,000. Selling in a cash account would result in capital gains taxes on your $9,000 profit. However, if the trades were made within a TFSA, there would be no taxes on the gain.

This is why consulting a Certified Financial Planner (CFP), or your tax advisor is essential to determine the best strategy for your situation.

Return to Question Covered

 How much money should I expect to invest to start?

Before You Start Investing

Before you decide to invest your money, ensure you have done the following:

  • Paid off high-interest debt: Such as credit cards.
  • Built an emergency fund: For unexpected situations like sudden illness or injury.
  • Set aside cash for major expenses: Expected within the next year.

Once you have these situations safely in hand, it is time to think about investing and how much to invest.

How Much to Start With

No One-Size-Fits-All Strategy

Everyone has unique circumstances, goals, income, lifestyle, bills, and time horizons. If you have C$100 to start, that is a fine beginning. You can open a direct trading account and buy some shares.

  • Transaction Fees: As of May 2024, most direct trading accounts in Canada charge a transaction fee of $10 or less, so you will have around $90 to invest.
  • Maintenance Fees: If you do not meet the minimum balance requirements of your financial institution, you might incur a maintenance fee. In such cases, consider low-cost platforms like Questrade or Wealthsimple, which charge minimal fees, if any.

A Starting Amount – $3,000 for a Solid Start

In my experience, having around $3,000 is a solid initial amount to place in your direct trading account and be able to start investing immediately. If you have more, that is even better. This amount allows you to:

  • Purchase shares in two or more proven, stable companies.
  • Start and form the core of your portfolio.
  • Benefit from dividends (assuming you choose dividend-paying companies).

Investing in proven dividend payers (such as banks, telecom companies, or utilities) will let you see your money working for you through dividend payments. This can be particularly reassuring if the companies you select experience temporary drops in share price. However, keep in mind that dividends are not guaranteed and should not be the sole reason for choosing a company.

Starting with Less – Even $100 is Enough

If you only have $100, that is still enough to start.

  • Open a direct trading account through your financial institution to get a free account or consider using a low-cost platform like some of the ones mentioned previously. You can research options to find one that suits your needs.
  • Identify a company you would be proud to own and believe will perform well over the next five years or more.
  • If you do not have enough money in your trading account to immediately invest in a company, keep adding money to your trading account on a regular basis until you have saved up enough money. In the meantime, follow one or two companies that you would be proud to own.
  • Once you have enough money, buy a few shares, and you will become a part-owner of that company. 😊

Building Your Portfolio – My Experience

I began with $3,000 and often recommend this amount to new investors. As you save more money:

  • Move it into your trading account promptly, or setup automatic transfers, to avoid spending it impulsively.
  • If you are charged a fee for each transaction, save until you can buy a few shares at once. The less fees you have to pay the more you have to invest. Transaction fees are something to consider, but do not let them be your primary guide as to when to invest. If you see a company you want to invest in, purchase the shares. (I typically wait until I have $2,000 before investing in multiple companies, though I might act with $1,000 or less if a great opportunity arises.)

Diversify Your Holdings – Aim for Diversification

As your cash accumulates, think about other companies you would be proud to own. Do some due diligence to see if they are a good fit for your portfolio. Keep a list of promising companies for future reference, as the companies on your radar will evolve over time.

  • Aim to diversify your holdings across at least 15 companies to lower your risk.
  • Each time you have enough cash to buy more shares, consider if the new company is better than those you already own. If it is not, it might be wiser to buy more shares of your proven winners.

Think of it as backing the lead horse during the race, rather than betting on a new contender. 😊

Return to Question Covered

 What about fractional shares?

Fractional shares are a revolutionary way to invest, allowing you to own a piece of even the most expensive companies without needing a huge amount of money upfront. The ease of buying fractional shares makes it super simple to start investing in some of the top companies. Think of investing in Constellation Software (TSE: CSU) for just $50 instead of needing thousands! While this feature is more common in the US at brokers such as Robinhood, Fidelity, and Charles Schwab, Canadian options are limited. Fortunately, a few Canadian brokerages such as Wealthsimple and Interactive Brokers offer fractional share purchases allowing you to invest in expensive companies with smaller amounts. Unfortunately, trading accounts with most Canadian banks do not support this capability (at least my TD Direct Investing account does not).

If the companies you are interested in are very expensive, buying a fraction of share might be an effective way to become an owner. Fractional shares offer several advantages over whole shares, especially for beginning investors or those on a budget:

  • Lower barrier to entry: This is the biggest perk. Fractional shares allow you to invest in companies with high share prices that might otherwise be out of reach. For instance, if a stock trades at $1,000 per share, you can still invest in the company with a smaller amount, say $200, which would buy you a fraction of a share.
  • Improved diversification: A core tenet of investing is diversification, which means spreading your money across various investments to reduce risk. Fractional shares allow you to include more companies in your portfolio without a significant upfront investment. This helps you achieve better diversification even with limited capital.
  • Dollar-cost averaging: This strategy involves investing a fixed amount of money at regular intervals. Fractional shares can be particularly useful for dollar-cost averaging because you can invest your set amount regardless of the stock price. This allows for consistent participation in the market.
  • Invest leftover cash: If you have small amounts of money leftover after other investments, fractional shares enable you to put that money to work rather than letting it sit idle.
  • Potentially faster returns: With fractional shares, you can start benefiting from potential growth and dividends sooner rather than waiting to save enough for a whole share.

Remember, while there are advantages, there are also some things to consider with fractional shares:

  • Voting rights: Generally, only holders of whole shares get voting rights on company matters. Fractional share ownership typically does not come with voting rights.
  • Dividend distribution: Dividends are typically paid per share. With a fractional share, you might receive a very small fraction of a dividend, which some brokerages may round down to zero.
  • Potential fees: Some brokers may have minimum fees per trade. With fractional shares, this could eat into a smaller investment more proportionally than with a whole share purchase.
  • Psychology: Some investors may prefer the simplicity of owning whole shares. It can be easier to track and understand your portfolio holdings when dealing in whole numbers.

If you are interested in buying fractional shares, check with your broker to confirm they offer this service and understand any potential transaction fees, as policies can vary. To optimize your investment, consider using an online broker that does not charge transaction fees. After all, buying a $100 fractional share only to lose $10 in fees each time you purchase a fractional share would almost defeat the purpose.

Return to Question Covered

 What about transaction fees?

Every dollar counts in the world of investing, and transaction fees can add up faster than you might realize and eat away at your investment returns. If you are just getting started investing, understanding the ins and outs of transaction fees is essential for maximizing your investment gains.

A few years ago, there were TV ads where folks blamed transaction fees for missed investment opportunities. But they are not telling the whole story. The full picture involves several factors such as stock selection, investment duration, and trading frequency. Success in investing depends on a combination of factors, however, eliminating transaction fees puts more money to work for you.

If advanced features are not a priority, opting for a commission-free online broker can significantly reduce transaction costs, especially for frequent traders. In Canada, platforms like Wealthsimple Trade, Questrade, and TD Easy Trade offer commission-free trading, while in the US, Robinhood, E*TRADE, and Charles Schwab are popular choices. This is particularly beneficial for day traders and frequent traders, where transaction fees can accumulate rapidly.

However, if you are a “buy and hold” investor, paying $10 per transaction on 25 different companies amounts to $250 in fees. Even with a no-fee platform, would that $250 really make a difference in your long-term goals, like saving for a home or retirement? Probably not. Those fees often provide access to valuable features like advanced charting tools, price alerts, in-depth research reports, professional broker assistance, and phone support for trading or platform help. Brokers such as TD Direct Investing, Scotia iTRADE, and BMO InvestorLine provide these features alongside competitive fee structures.

In addition to fees, it is crucial to assess the security and customer service reputation of the brokerage. Some commission-free brokers have faced scrutiny over data security and trade execution quality, highlighting the importance of due diligence.

While transaction fees are a consideration, investing is about more than just minimizing costs. Your choice of brokerage should align with your investment goals, strategy, and comfort level with trading. Take the time to evaluate your needs and compare the features, fees, and services of different brokers to make an informed decision.

Return to Question Covered