Investing Questions & Answers

Below are my thoughts on a number of questions I get asked when friends discover I invest in companies.

My answers are based upon my experience buying and selling shares in publicly traded companies through online trading.

While the examples are in Canadian dollars, the principles are generally the same for any country and currency.

1. Why should I invest in the stock market?
2. But why bother to invest when there’s always something that could negatively impact your investments?
3. Why is investing in the stock market better than putting your money under your mattress?
4. What should I consider before investing?
5. What type of risks of should I be aware of if I’m going to invest directly in companies?
6. How is a TFSA different from an RRSP?
7. Does it take a lot of time to invest in stocks?
8. How much research should I do?
9. What are stocks, actually?
10. What are the different types of stocks?
11. Common Stocks
12. Preferred Stocks
13. Is it better to invest in Canadian or American stocks?
14. How much money should I expect to invest to start?
15. What about transaction fees?
16. What about fractional shares?
17. When should I start investing?
18. Cautionary note: The downside of compound interest
19. How do I get started investing in publicly traded companies?
20. But I don’t know how to get started
21. Besides Canadian or US companies, what type of companies should I start with?
22. After I’ve created the core of my portfolio, what type of companies should I consider?
23. What are sectors?
24. What are market caps?

Why should I invest in the stock market?

With a current inflation rate of 4.1% in Canada (5% in the US), as of September 2021, working against my money and financial institutions offering less than 1% interest to grow my money, the purchasing power of my hard earned cash is deteriorating over time. So, let me flip that around and ask why wouldn’t I invest in the market and get my money working for me?

Leaving taxes out, take the following example, if I wanted to purchase a $1,000 widget and if I had the money, I could buy it today for $1,000. However, if I decide to put off the purchase for a year and leave the money in a savings account earning interest, a year from now, thanks to inflation, I would no longer be able to purchase the widget for $1,000 as the widget would cost $1037.00 ($1000 x 1.041) and the money in the savings account would’ve grown to only $1,010 ($1,000 x 1.01). And it gets worse as the years add up.

This table and chart illustrate that while your money is growing, albeit very slowly, inflation increases the cost of products and eats away at your ability to purchase items.

For those who prefer visuals to numbers, the chart below illustrates the increasing gap between the cost of a widget and the amount put away in a regular bank account. Each year you will need more money to buy the same product.

Unless there is another way to protect your money from inflation, investing wisely in the market is the best way to not only keep up with inflation but also get your money working for you. Make your money work while you sleep.

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But why bother to invest when there’s always something that could negatively impact your investments?

I invest because of the tremendous potential upside of the markets. The maximum I can lose is my original investment (I like to think I would get out well before I lost 100% of my investment), while the upside is unlimited. In the last 20+ years there have been 3 black swan events (9/11, the banking crisis, and the Covid 19 pandemic) and each time the markets have rebounded after the drop. Both the Canadian benchmark TSX Composite and the US benchmark S&P 500 have risen almost 300% since September 9, 2001, to September 14, 2021. While there will continue to be short term market drops, if you don’t need the money at that time, the markets will eventually recover, and your investments will continue to grow. If you have a definite need for cash within the next year you should not have your money invested in the market.

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Why is investing in the stock market better than putting your money under your mattress?

Most mattresses pay 0% interest and are not a very secure way to stash your money. In the event of a robbery or fire the cash could literally go up in smoke and you’ll be left with nothing.

While financial institutions (banks, credit unions, etc.) are significantly more secure than a mattress, they currently provide less than 1% interest. Most financial institutions provide an investment product called a GIC (Guaranteed Investment Certificate) that pays 1 – 2%, depending on the length of term. During the term you do not have access to your money without incurring a withdrawal penalty which could leave you with less than you started.

The other option is to invest in the stock markets. You can invest in in the market in a few ways including mutual funds, index funds, Electronic Traded Funds (ETFs) or directly by purchasing shares of individual companies.

My initial investments in the stock market were through mutual funds, then a few direct stock purchases. Since 2015 I’ve only invested directly in companies.

This site is focused on investing in companies directly through the purchase of shares in publicly traded companies. If you are interested in investing in ETFs or mutual funds check with a financial advisor or your financial institution for funds that will help you meet your goals. Below is a very brief description of mutual funds, index funds and ETFs.

Mutual funds: Your money is pooled with other individual investors to enjoy economies of scale to invest in a diverse and wider variety of companies and bonds than you could afford to buy yourself; it is easy to setup regular monthly contributions to take advantage of dollar cost averaging (see Investing Terms); each mutual fund is managed by a professional money management group who charge an expense fee for this service (referred to as the Management Expense Ratio or MER); because of their diverse mix of assets, mutual funds tend to be less volatile than individual stocks so the prices doesn’t fall as hard as an individual stock but they don’t rise as quickly either; mutual funds only trade once a day after the market closes; there are thousands of mutual funds available so you should found a combination that suits your goals.

https://www.investopedia.com/terms/m/mutualfund.asp

Exchange Traded Fund (ETF): a basket of securities that trade on an exchange like an individual stock and they can be bought and sold throughout the trading day; there are ETFs that focus on stocks, bonds, industries and commodities and other areas; ETFs offer lower expense ratios than mutual funds.

https://www.investopedia.com/terms/e/etf.asp

Index fund: A portfolio of stocks or bonds designed to mirror both the composition and performance of a financial market index such as the S&P/TSX Composite index, the S&P 500, or the Dow Jones Industrial Average; because it mirrors an index it seeks to match the return and risk of that index; based on the theory that the market will outperform any single investment; since index funds follow a passive investment strategy they have lower expenses than actively managed funds, such as mutual funds.

In all cases, lower expenses typically lead to better returns as you keep the money working for you rather than losing it to money managers.

https://www.investopedia.com/terms/i/indexfund.asp

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What should I consider before investing?

• Pay off all high interest, debt.
• Ensure you have enough cash in reserve in the event of a sudden unexpected illness or injury, unplanned home repairs, or sudden car repairs.
• Figure out your time horizon. Will you need the money within the next year or two or do you have years left to weather the market’s ups and downs?
• Do you have a reason for investing or are you playing around?
• What is your emotional disposition? Can you handle the volatility of the market? Be honest with yourself because its one thing to say you can handle the market rollercoaster but its another ting altogether when you see your portfolio down 30% in a few days.
• How stable is your income? Can you afford to invest a little bit every month, or do you rely on random contributions to build your savings and investments?
• Prepare a Net Worth / Income Statement for yourself/family so you know and understand your financial position. Know how much you’re spending on every category in your life
• Track your spending to know where the money goes and where you could save a few bucks. It can be an eye opener to see what you spend on things like alcohol.
• Talk to a financial planner to determine the best account(s) to use for investing. RSP, TFSA or cash account. The financial planner will also be able to present you with investing options to consider.
• While no one knows the future, make sure your estate and affairs are in order. Speak with an estate planner to ensure your will is properly setup to maximize the money that goes to beneficiaries. Why give money to the taxman when they have done nothing to earn anything from your estate.

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What type of risks of should I be aware of if I’m going to invest directly in companies?

The risk of losing money is always a factor when investing in the stock market. The company you invest in could be poorly managed, fail to execute, get disrupted by a new industry (think newspaper industry or photography film), commit accounting irregularities, or commit fraud. Any of these will cause the share price of an individual company to go down. Other than accounting irregularities and fraud, the drift downward tends to be gradual. If you invest in only 1 company, then you have considerable risk. By investing in at least 15 companies, across different types of companies (for example, technology (Microsoft), banking (Royal Bank), consumables (Monster Energy Drinks)), in different industries you can considerably decrease the risk. If 1 company stumbles and the other 14+ companies you own continue to grow, the 14+ other companies will more than make up for the 1 company that stumbles.

Lesson: Diversity reduces risk.

My style of investing to find good companies, do my own due diligence on the company before deciding to invest and if I decide to become a part owner of a company, I plan to hold onto the company for 5 years. This allows me to not be concerned with the short-term fluctuations of the stock price and lets me focus on how the company is doing. While this has worked for me for the vast majority of companies I’ve invested in, I’ve occasionally still picked a bad apple, such as Luckin Coffee. (Luckin was found to have cooked their books causing the share price to drop by ~90%. In my case, I bought in at US$ 46.02 and sold at US$ 2.12. Ouch!)

Other than picking a bad company, since you don’t have a loss until you actually sell your shares in a company that is underperforming, the biggest risk is needing money when the market falls. If you don’t need the money and nothing has changed with the company, the share price is very likely to rebound and continue moving upward. A perfect example is the market crash in March 2020. Every stock fell, and it hurt to see the portfolios fall 30%, but by leaving the investments alone I was able to ride the recovery up past the pre-pandemic highs.

Lesson: Time is your friend.

If you think you’ll need money in the next year you should move it out of the stock market into more conservative savings areas as the goal has changed from growing your money to preserving your money.

Other risks include:

• Having all your eggs in 1 basket: invest in too few companies. Try to grow your investment portfolio to 15+ companies.
• Chasing the latest rising star and then selling at the first hiccup: In Canada this generates a fee on each transaction and possibly triggers capital gains taxes. You are churning your portfolio and increasing your expenses. It’s better to select good quality companies with a bright future and let them do the heavy lifting to grow your money.
• Letting emotions drive decision making: For example, buy a solid growth company, watch it go up 10%, see the price go down 2%, then sell it because you think the sky is falling when nothing has changed and you were still up. If you actually owned the company, would you sell your company just because the share price went down? No, you’d keep your head down, keep working to grow your company and let others worry about share price. When your company grows, share price follows.
• Taking the markets personally causes you to focus on trying to be ‘right’ rather than trying to make money. The markets don’t know you and are not playing to beat you. They just do what they’re going to do and you have zero control over them. For example, sometimes when investing in a company I think the shares price should fall back a bit so I bid accordingly rather than just buying the shares at the market price. The price does not fall back and I end up buying the shares for more than if I’d just bought them when I first decided to purchase them.
• Buying the latest ‘hot fad’ such as meme stocks: Avoid glittery investments such as hedge funds, and other theme du jour trends like meme stocks (e.g. GameStop) or SPACs (Special Purpose Acquisition Corporation). You are a very small fish in the scheme of these things and the bigger fish are only concerned about getting bigger.

You should also be aware of tax implications when you sell shares. The government always wants, and gets, its pound of flesh so make sure you remember you’ll have to pay tax on all capital gains in a cash account or when you withdraw money from an RRSP.

Finally, avoid margin accounts. The trading companies are happy to lend you money (and charge you interest) but you must pay it back at some point, even if the company you invest in falls. The trading companies have the right to call your loan at any time and can sell your shares in other companies to recoup their loan.

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How is a TFSA different from an RRSP?

As this question has tax implications you should consult with a financial advisor and/or your tax accountant to determine how you can maximize both of these registered accounts.

Here is my take (remember, I’m not a Certified Financial Planner nor an accountant). Inside a TFSA (Tax Free Savings Account) and RRSP (Registered Retirement Savings Plan) you are limited to:

• Cash
• Mutual funds, segregated funds, exchange-traded funds
• Securities listed on a designated stock exchange
• Corporate bonds
• Government bonds

For a complete list of qualifying investments and prohibited investments, check out these links on the CRA has website.

Both have yearly maximum contributions with penalties for exceeding the maximum contribution. In an RRSP you can deposit money and get a tax deduction but when you withdraw money from the RRSP you will have to pay taxes at your tax rate at the time of the withdrawal. In theory you won’t make any withdrawals until you retire, and your income is lower than when you made the deposit, allowing you to pay less in taxes than you would have when you made the deposit.

A TFSA is an after-tax savings account where your money can grow tax free. When you withdraw money from your TFSA you will not have to pay any tax on the withdrawal. This is a great place for growth stocks as there will be no capital gains taxes on your investments.

To illustrate the difference between an RRSP and a TFSA, here is an example. If you deposited $5,000 in your RSP and bought 100 shares of Shopify in 2015 when it was $50 per share it would’ve cost you $5,000. If you decided to sell your Shopify shares in 2021 it would be worth around $1,900 per share or $190,000 for a profit of $185,000. While you would have received a tax deduction in 2015, you would have to pay income tax on the withdrawal. If you withdrew the $190,000 all at once you would put yourself in a very high tax bracket and be taxed accordingly.

In a TFSA, in the same scenario as above, you’d now have $190,000 in your TFSA. However, your $190,000 could be withdrawn with no tax deductions. While you wouldn’t have gotten a tax deduction in 2015, you could withdraw the full $190,000 without having to pay any tax.

While Shopify is an extreme but true example, not every investment grows that much that quickly. In my opinion, you should have a TFSA and take full advantage of it by placing investments with high growth potential inside your TFSA. The taxman always gets their pound of flesh so speak with a financial advisor about maximizing the use of your TFSA and RRSP accounts to minimize your taxes.

https://www.td.com/ca/en/personal-banking/personal-investing/learn/comparing-tfsa-vs-rrsp/

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Does it take a lot of time to invest in stocks?

It takes as much time as you want to put into it. You can buy a simple, low-cost S&P 500 index fund and be done with it. Your investment will simply track the top 500 stocks that trade on the major US exchanges (New York Stock Exchange and NASDAQ). You will be well diversified across the top 500 companies, thus lowering your risk, while matching the gains of the S&P 500. In fact, that is a great way to get started while you learn about the stock market. If you’ve made the decision to make your money work for you then check out an index fund or a few well-known companies.

On the other hand, you could spend quite a lot of time learning about the market, researching individual companies to determine which companies look to have the best prospects and then buying and selling stocks. It really depends on how much time you have, how much time you want to spend on researching and performing due diligence on companies and your mindset (how much do you want to know what’s happening in the market).

If you’re reading this, you are probably somewhere in the middle. I enjoy looking for the next Amazon or the next company to change an industry, researching companies that catch my eye, and even the adrenalin rush of clicking the Buy button in my online trading account wondering if I could I’ve bid less or have I bid too low and I’ll end up having to chase the share price.

Spend time doing the things you enjoy in life and then fit time in for investing. If you don’t have much spare time, then go with an index fund that tracks the S&P 500 Index. Or start slowly and ease into investing at a pace that suits you. If a new company you’d be proud to own comes across your radar, then look into it otherwise, enjoy your like.

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How much research should I do?

Now that you’ve made the decision to make your money work for you, its time to perform some research to ensure your money is making money for you. I would suggest you spend as much time researching investments as you would spend time researching the purchase of a new car, at a minimum. However, it depends on how interested you are in doing the research, your free time, and your mindset. If you want to do minimal research, look for a S&P500 Index ETF that mirrors the S&P 500 Index and put your money into it. Your investment will track the S&P 500. On the other hand, if you are interested in individual companies and are prepared to do a bit of work, start with well-known companies because it will be easier to find information on these companies. These companies tend to be larger, have an Investor Relations department, and are watched by numerous analysts. Smaller companies are almost the opposite – no investor Relations department to produce glitzy, easy to follow presentations & little coverage by analysts – and can be quite frustrating to research.

Another option is what I call the boots on the ground approach or bottom up (as opposed to the top down, described above). If there is a product you always buy or see others buying, say Tim Horton’s or Starbucks, you could see if it is a public company (both are) and then investigate the company online and see if you like the company’s prospects (do you see the company continuously growing over the next 5+ years?). Go to the company’s web site, read their ‘About’ section to get a feel for the company and management, check out their Investors Relations section to find out how they did and where they plan to go. Keep in mind that these investor presentations and news releases are designed to make the company look good. To find a document with less spin you can always check their latest quarterly report that has to be filed with the national regulatory bodies. These reports can usually be found on the company’s website, if not they can be found on SEDAR for companies listed on Canadian exchanges or the SEC for companies listed on US exchanges. This should give you a feel for the company without having to look at numbers. If you enjoy looking at numbers, check out the most recent Financial Statements to see how the company is doing.

Whether you do a top down or bottom-up review, if you like the company, buy a few shares to get in the game. Once you are in the game you tend to pay attention more.

If you enjoy the investing process, educate yourself about investing and how to perform due diligence on companies that interest you. Develop a process that you perform for every company you consider investing in. Keep in mind, the more due diligence you do not only tilts the odds in your favour but better prepares you to handle the inevitable drops the company and the markets will go through, without causing you to panic and sell low.

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What are stocks, actually?

Let’s start with the difference between stocks and shares, although they are used interchangeably. A company has two ways of raising money, or capital, it can issue stocks, or it can borrow money (usually in the form of a bond or loan). A stock represents the ownership of a part of a corporation (albeit a very, very, very small part of a publicly traded company), entitling the owner of the stock to a fraction of the company’s assets and profits equal to how much stock they own. Each unit of stock is called a “share.”

There can be private sales but the majority of shares are bought and sold predominantly on stock exchanges such as the Toronto Stock Exchange, the New York Stock Exchange, or NASDAQ. Shares of public companies, like TD Bank and Apple are the core of many individual investors’ portfolios.

By buying and selling shares through one of the stock exchanges you are less likely to encounter fraudulent practises because transactions on the exchanges are monitored and must conform to government regulations.

When you purchase shares through your online broker you will get a confirmation of the number of shares you purchased and the price per share you agreed to. You will also receive a confirmation when you sell shares. Other than these confirmations, it is very unlikely you will receive a paper certificate showing the number of shares you own as most companies stopped providing paper stock certificates years ago.

The Walt Disney Company was one of the most popular certificates because of the colourful images of popular Disney characters. They were a popular gift among parents and grandparents who wanted to teach their kids about the stock market. Disney stopped issuing the paper stock certificates to shareholders on Oct. 16, 2013. However, they are offering shareholders “certificates of acquisition,” if requested but they hold no value.

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What are the different types of stocks?

There are 2 types of stock: common and preferred.

Common Stocks

When people refer to stocks, they typically are referring to what are known as common stocks. Most common shares have voting rights and allow stockholders to participate in major decisions made by the company, although an individual investor has extremely little impact on decisions (even if you had 1,000 shares of Apple that number would be inconsequential when there are over 16 billion shares outstanding.

Depending on the company you invest in price volatility can be relatively high, especially for younger, high growth companies. However, investing in high growth companies is where you are most likely to achieve long-term capital growth.

Young, fast-growing companies tend to reinvest their earnings in themselves rather than pay out a dividend. However, older more mature companies, or companies in industries where companies do not have the same growth rate (think utilities and banks, among other industries) and/or are constantly bringing in more than enough capital to fund their operations (think Apple, Microsoft), will provide a dividend.

The drawback to common stock is in the event of the company goes bankrupt, owners of common stock are the last ones in line to be paid.

Preferred Stocks

If you are looking for guaranteed fixed income, then preferred stocks, if a company offers them, provide a guaranteed fixed dividend. Unlike common stock, preferred stocks do not provide voting rights to shareholders. However, in the event of bankruptcy, preferred shareholders are paid off before common shareholders.

If the preferred stock provides the issuing company with the option to buy back the preferred shares, the company has the right to buy back the preferred shares from shareholders anytime at a predetermined price and date as indicated in the prospectus.

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Is it better to invest in Canadian or American stocks?

In Canada, we are lucky to be able to invest in both Canadian and American companies. So why not invest in the best companies available through any of the Canadian and American exchanges? One drawback for Canadian investors is the exchange rate but consider that the cost of investing in the world’s largest market. Another drawback is tax implications. For advice on the tax implications of investing in US companies you should talk with a CPA tax expert and/or a certified financial adviser.

Depending on the type of companies you want to invest in will dictate where you purchase your shares and the currency used. If you want to invest in energy (oil & gas) or natural resources, then the TSX is where you will likely be investing. This does not mean you can’t find good energy companies on the US exchanges but why pay the foreign exchange if you don’t have to. If you are interested in technology, healthcare, consumer goods or other industries then you’ll find more opportunities on the US exchanges. There also good Canadian companies in these industries but there are many more on the US exchanges. As well, there are over 250 stocks listed on the TSX and the TSX-V that are cross listed on the US stock markets. In the case where a company is listed on both Canadian and American exchanges (e.g., banks, Shopify, CN Rail) then buy the shares on the Canadian exchange to avoid losing money on the exchange rate.

As you can see in the table above, the top Canadian companies include four banks (Royal Bank, Toronto Dominion (TD), Bank of Montreal (BMO) and Bank of Nova Scotia (Scotiabank), three industrials (Canadian Pacific Kansas City Limited, Canadian National Railway, and Thomson Reuters), two energy (Canadian Natural Resources and Enbridge), and one consumer cyclical company (Alimentation Couche-Tard). Of the ten largest US companies, three are technology companies (Apple, Microsoft and Nvidia), two Communications Services (Alphabet and Meta), two Consumer Cyclicals (Amazon and Tesla), two financial services (Berkshire Hathaway, and Visa), and one healthcare (Eli Lilly). Since I’m most interested in technology companies, I would look at the US markets first. If I was interested in a bank or a financial services company I would only look in Canada for a bank (invest in what you know and I only know about Canadian banks) but I would look at both sides of the border for a financial services company since I’m well aware of the major credit card companies, such as Visa and Mastercard, as well as the leading online platform PayPal.

Another thing to keep in mind, many Canadian companies aspire to be listed on a US exchange. I’m not aware of any American companies on the NYSE or Nasdaq aspiring to be on the Canadian exchange. Identify the company that best fits your requirements. Be aware of what exchange it trades on but don’t rule out a company because of the exchange rate.

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How much money should I expect to invest to start?

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

• Paid off any high interest debt, like credit cards.

• An emergency fund for unexpected situations such as a sudden unexpected illness or injury.

• Have cash set aside for any major expenses you expect to pay within the next year.

Once you have those situations safely in hand then it’s time to think about investing and how much to invest.

There is no one size fits all strategy. Everyone has their own unique situation with different goals, income, lifestyle, bills to pay, time horizon, etc.  If all you have is $100 that’s great. You can open a direct trading account and buy some shares in a company. Keep in mind that as of September 2021 most direct trading accounts in Canada charge a transaction fee of $10 or less so you really only have $90 in buying power, assuming you buy shares in only 1 company and the shares of that company cost less than $90 per share. As well, if you don’t have a financial relationship that meets the minimum requirement of your financial institution, you’ll have a regular maintenance fee. If that’s your situation, look at one of the third-party trading platforms like Questrade or WealthSimple. Both companies charge a minimum fee if any at all.

I’ve found having around $3,000 is a good initial amount to place in your direct trading account. If you have more that’s even better. This allows you to purchase shares in 2 or more proven companies that will form the initial core of your portfolio, continue to grow in value over the long run and provide dividends (assuming you purchase companies that pay a dividend). By choosing proven dividend payers (such as, banks, telecom companies or utilities), when you receive your first dividend payment you will see your money working for you. It is always good to see money coming in, especially if the companies you selected have their share price drop temporarily for whatever reason.

However, if you only $100 bucks saved up that’s enough to purchase your first shares and become an owner of a company. Start by opening up a direct trading account by either taking advantage of a household relationship with your financial institution to open up a free direct investing account or open a no or low-cost account with a company like Questrade, Q-trade or Wealthsimple. Once you have a trading account, determine which company you would be proud to own AND you think will do well over the next 5+ years, buy a few shares and you are now a part owner of a company.

I started with $3,000 and have suggested that amount to others who are starting down their own investment path. As you save more money for investment purchases move it into your trading account immediately to remove the temptation to spend it on an impulse buy. If you are charged a fee for each transaction, it’s better to build up your cash to the point you can buy at least a few shares in a company in one transaction. (I typically wait until I have $2,000 before investing in a few companies, although if I only had $1,000 and a great opportunity came up, I’d probably buy.) As the cash in your trading account accumulates start thinking about other companies you’d like to own. Perhaps do a little due diligence to see if you would really like to own the company or how it compares to other companies on your radar. If you’re impressed by a company, make a note for future reference. The list of companies on your radar will be constantly changing as companies come and go from your consciousness or as you rule them out for various reasons. When you have enough in your investment account to purchase a few shares of one or more companies then go ahead and purchase them.

Try to build up the number of companies you own to at least 15 companies to diversify your holdings and lower your risk level. Each time you have built up cash in your investment account and decide its time to buy, and you own more than 15 companies, ask yourself if the company you are considering buying is better than any of the companies you already own. If it’s not, then it’s better to purchase more shares of your proven winners rather than on a company you aren’t sure of. Think of it as betting on the lead horse on the backstretch rather when all horses are in the starting gate.

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What about transaction fees?

Currently there is an ad on TV where the people imply transaction fees are holding them back from making big money like their friends. This is so misleading. For instance, what companies have they invested in compared to their friends? How long has each party been investing? As well, if you are a buy and hold investor and invest in 25 companies with a $10 transaction fee for each purchase it will cost you $250. Assuming you could’ve made those same transactions for no cost, is that $250 really going to allow you to buy a house? Plus, if you plan to do any due diligence before investing, the research resources at the no fee direct investing companies are minimal at best. Now, if you are a day trader or are always buying and selling the fees will add up, not to mention the taxes you may trigger every time you sell.

For me, the research resources at TD Direct Investing more than make up for the transaction fees. Looking at the big picture, there is more to investing than transaction fees.

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What about fractional shares?

In the US, unlike Canada, most direct trading brokers do not charge a transaction fee. Another important difference between the two countries is in the US you can buy fractional shares.  That is, if you want to become an owner of Amazon, instead of buying 1 share for US$ 3288 (Oct. 8 market close price), you could purchase 1/10 of a share for US$ 328. With no transaction fees and the ability to buy fractional shares you could slowly build a position in any company. Well … maybe not Berkshire Hathaway A shares at US$ 427,765 each.  The combination of the ability to purchase fractional shares and no transaction fees make it really easy to start investing in some of the top US companies. Unfortunately that is only possible with a US based direct trading account. I know what you’re thinking, ‘why not open a US based trading account?’ I don’t have a great answer to that other than there are some hoops you’d have to go through, including filling out at least one of the US’s Internal Revenue Service’s (IRS) forms. For me, I’d rather only worry about one taxman (the Canada Revenue Agency) than two.

While you currently can’t buy fractional shares in Canada, in August, 2021, a new type of security called a Canadian Depository Receipt (CDR) began trading on the TSX. CDRs are a lot like traditional shares in companies: they trade on an exchange; provide flow through dividends and have voting rights. The list of CDRs is growing but currently there are less than a dozen CDRs (mainly the big US technology companies, like Amazon and Google). These CDRs were launched in the $20 range and they track the underlying company’s actual share price. If you are interested in CDRs, here is a great article for more information . You can also contact your direct trading customer service to get more information (being able to talk to someone about this type of thing is one reason why I’m not concerned about my transaction fees).

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When should I start investing?

NOW! The sooner you can start saving and investing, the sooner, and hopefully longer, you can get your money working for you and let compounding work its magic on your investments. The tables below provide a good example. In Table below, Marie starts investing $2,400 at the start of the year at age 20. Life starts to happen at 30 so she must stop investing. For John, life starts 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. Assuming a growth rate of 8% for both, who will have the larger retirement nest egg at 65?

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Over 11 years, Marie invests a total of $26,400 for a nest egg of $637,915. Meanwhile, John invests a total of $124,800 over 26 years for a $414,484 nest egg. So, even though John invested twice as much, for more than twice as long as Marie, she has a significantly larger nest egg (almost 54%, or $223,431, more).

If you think something must be wrong with those numbers to create such a large discrepancy, here is the formula to calculate the future value.

FV=P * (1+r)n
P = principle or initial amount
r = growth rate
n = number of years

Although it is never too late to start investing, I hope you can see the advantage of saving and investing as soon as possible. The benefits of compound interest become more apparent when looked at over a long period of time. This is part of why it is so important to begin investing at a young age. So, start saving and getting your money working for you!

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Cautionary note: The downside of compound interest

Just as compounding interest can help you grow your savings, it can work against you when paying off debt. Some credit cards compound interest daily on your balance. This equates to a higher interest amount due when you carry over balances’ month-to-month.

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How do I get started investing in publicly traded companies?

The first thing you need to do is get yourself a trading account so you can buy and sell stocks in companies, or as I like to think, become a part owner of different companies.
My first investment in a public company was back in the early 90s, before the internet, when you had to call a stockbroker to make a trade, buy shares in multiples of one hundred and the transaction fee was $50. Fast forward to today and I’d be hard pressed to name a full service brokerage although they are still available if you have don’t want to spend minimal time thinking about your investments and have the resources to cover the various fees.

Since this blog is aimed at individuals interested in doing their own investing the best way to get started is to open a low-cost investment account. As well as direct investing services provided by each of the big 6 Canadian banks, there are several popular third-party trading platforms such as Questrade, QTrade and Wealthsimple. Below is a partial list of well-known online brokers.

• BMO InvestorLine
• CIBC Investors Edge
• HSBC InvestDirect
• RBC Direct Investing
• Scotia i-Trade
• TD Direct Investing
• Questrade
• QTrade Discount
• WealthSimple

Most of the banks require a minimum amount in your trading account otherwise they charge a fee. However, if you have a total household financial relationship (mortgage, savings account, etc.) with the bank over a certain threshold those maintenance fees are waived. If you are opening your first direct trading account, check out the service provided by your financial institution. Having your trading account with your financial institution makes it easy to transfer money to and from your trading account (otherwise you need to setup some way to transfer money to and from your trading account); they have financial planners who can help you with an overall wealth management plan; you can open cash, TFSA, and RSP/RIF accounts in Canadian and American currencies; and, you can buy and sell on the major Canadian and US exchanges as well as the secondary exchanges such as the Canadian Securities Exchange (CSE) in Canada and the Over The Counter Market (OTCM) in the US.

If you don’t meet the threshold to have your financial institution waive the maintenance fees, then you are a free agent to go to whatever trading platform fits you best. Do you want: research capabilities to look for investments or perform your own due diligence on companies that come across your radar; the lowest transaction fees; access to all the North American markets; training resources to help you understand this investing thing; ability to easily talk to someone if you have any questions. Consider your investing knowledge, your level of experience and what features you’re looking for then check out the online investing companies listed above.

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But I don’t know how to get started!

Going with your financial institution’s online broker is a good place to start for the convenience and ease of managing all your money under the one roof. Yes, there are trading fees (tax deductible) but there are other aspects to their service that are worth having, including tax documents, record keeping, access to research, instant currency transfer as needed, and instant transfers between investment and bank accounts.  In addition, will help you setup your direct trading account, connect it to your designated bank account and assist you with your initial transfer of money into your trading account.

When you apply for a direct trading account, ask for 6 sub-accounts to be setup for you:

• Cash accounts: you intend to pay cash in full for each purchase. You must have funds for the trade purchase in the cash account before the order can be placed. You’ll want to have a Canadian dollar account for trades on the Canadian exchanges and a US dollar account for trades on the US exchanges.
• Tax Free Savings Account (TFSA) accounts: Whether capital gains, dividends, or interest, your investment growth is not taxed and you won’t be taxed on withdrawals from your TFSA. As with the Cash account, you’ll want to have a Canadian dollar account for trades on the Canadian exchanges and a US dollar account for trades on the US exchanges.
• Registered Retirement Savings Plan (RSP) or Retirement Income Fund (RIF) accounts: in the case of a RSP account you can defer your taxes until you pull money out of the RSP, preferably when you are retired and in a lower tax bracket. In the case of a RIF, your investments can continue to grow tax deferred. As with a RSP, you will have to pay taxes when you remove money or assets from inside your RIF. As with the Cash and TFSA accounts, you’ll want to have a Canadian dollar account for trades on the Canadian exchanges and a US dollar account for trades on the US exchanges.

You should end up with a total of 6 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

You probably don’t need all of these initially but if you decide later you want them as part of your trading account you probably have to visit a bank to fill out paperwork. At the very least you’ll have the accounts available if you suddenly decide you want them.

Now that all your accounts are setup you are ready to buy and sell ownership in companies. Your first trade is likely to be in one of your two cash accounts (either Canadian or US dollar account) but if you have room in your TFSA consider transferring money into one of your TFSA, either the Canadian or US TFSA, depending on what company you want to invest in. As you buy and sell shares in companies in your cash accounts you are likely to trigger taxes. When you buy and sell inside a TFSA there are no tax implications and when you withdraw the money from the account it is tax free, hence the name Tax Free Savings Account (IMHO, one of the best self-explanatory names for any type of financial account).

For example, let’s say you buy 100 shares of ABC company at $10/share for an investment of $1000. Through brilliance or sheer luck, you picked a winner and shares in ABC company 2 years later are now worth $100/share making your 100 shares worth $10,000. If you decided to sell your shares in ABC Company, you would have made a profit of $9000. If you had made the buy and sell trades in a cash account you would be subject to capital gains taxes. On the other hand, if you had made these trades inside your TFSA there would be no taxes on your $9,000 gain.

This is why you should talk with a Certified Financial Planner (CFP) or your tax adviser to determine what is best for your situation.

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Besides Canadian or US companies, what type of companies should I start with?

While my initial investments had no rhyme or reason, they were companies I was familiar with, with experience and hindsight I wish I’d had a plan when I first started. Since I’ve gotten more serious about  investing, I’ve developed a semi gameplan on building a portfolio. Keep in mind that there is no perfect portfolio and no one style of investing will work for everyone. Your situation and personality are unique and that should drive the composition of your portfolio.

With that being said, here are my thoughts on starting a portfolio:

Aim to invest in 15 or more companies, diversified across sectors and types of companies. By types I mean companies that will become core holdings (you’ll buy and hold forever to let them grow and compound over time); dividend companies that provide 3% or more in regular dividends to generate cash; growth companies that can really add some growth to your portfolio; and SFTF (Swing For The Fences) companies that have a product that could totally change how things are done (think or Amazon or Netflix when the first started out).

For the first 3–5 investments, consider investing in less volatile and risky companies that will be the core of your portfolio. This can be a mix of large Canadian and American companies that should be less volatile and less risky. They are even better if they pay a dividend as I think it’s a morale booster to see money coming into your portfolio so you can see your money starting to work for you, especially if the share price initially drops. Canadian companies that come to mind are the major Canadian banks, the big 3 telecommunication companies, and railway companies. American companies include Berkshire Hathaway (B shares), any companies held by Berkshire Hathaway, big tech companies (Microsoft, Apple, Google).

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After I’ve created the core of my portfolio, what type of companies should I consider?

After the core of 3+ companies has been selected, consider more growth-oriented companies to boost the value of your portfolio. Look at bigger companies (medium and large market capitalization) that have shown strong growth in the recent past and look to be able to continue that growth trend into the future.

Decide the desired balance between growth companies and core/dividend companies. Use the core and dividend companies to offset the risk of growth companies. Diversify across the size (market capitalization) and types of companies.

As you add companies to your portfolio, think of pairing up investments. For example, invest in a bigger, less risky, core type company and in a higher risk, higher growth company. I invested in Visa and Virgin Galactic on the same day. Virgin Galactic is a SFTF (much higher risk) type of company while Visa is a well known core/growth company (with a dividend). For me, investing in Visa took some of the risk out of investing in Virgin Galactic.

Keep track of the size of market capitalization of the companies you invest in so you don’t end up with more than the number of companies you want based on sizes. A portfolio of all small cap companies is a lot more volatile and riskier than a mix of market cap sizes.

Keep track of the various industries the companies you’ve invested in so you don’t end up overloaded in any one industry. When you diversify across sectors and industries, you’re effectively spreading out risk. If one sector underperforms, it could be balanced out by a hot sector. When the hot sector pulls back, it can be offset by strong performance in another sector.

Once you have a well diversified portfolio, across market cap sizes and across a few sectors, and you have gotten comfortable with the whole concept of investing in companies (being a part owner), if you discover a young and exciting, emerging company take a deeper look at the company, its products, management & culture. If you think the company will be a big success, buy a few shares (if you have the appropriate mentality to invest in what is likely to be a company with a very volatile share price) and let the company prove its worthy of your money. See how it does on upcoming Quarterly Reports. If you like how the company is performing, consider buying some more shares. Remember you are buying the company and not the share price. In the long term (3+ years), as long as the company continues to perform the share price will follow, despite the share price going up one day and down the next.

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What are sectors?

In North America, all publicly traded companies are classified into one of eleven sectors, each with its own characteristics and features, and each sector can be broken down into more defined business groups called industries. The same eleven sectors are used in Canada for Canadian companies as used in the USA to classify American companies.

Below are the sectors for Canada’s TSX Composite Index (TSX) and the weight each sector has in the Index. The Financials (banks and insurance companies) is the largest sector, with natural resources (Energy and Materials) and Industrials rounding out the top four spots in the Index.

For more information on the S&P/TSX Composite Index, check out the S&P/TSX Composite Factsheet, under Documents on the S&P Dow Jones website.

Below are the sectors for the US’s S&P 500 Index (S&P) along with the weight each sector has in the Index. The Information Technology (aka Technology) is the largest sector, followed by Healthcare and Consumer Discretionary (aka Consumer Cyclical).

For more information on the S&P 500 Index, check out the S&P 500 (USD) Factsheet, under Documents on the S&P Dow Jones website.

Notice that Financials, which was the largest sector in the TSX, comes in at fourth on the S&P, while Energy and Materials (aka Basic Materials), rank eight and last, respectively on the S&P. The TSX is heavily weighted in favour of more traditional banks and resource companies, while the S&P is much more diverse and dominated by the growth-oriented sectors such as Technology, Healthcare, and Consumer Discretionary.

While the two Indexes often move in the same direction, they do not move together in lockstep. The TSX will respond more to the ups and downs of the Financials and Energy sectors, which tend to be less volatile. The S&P is moved by the high-growth Technology, Healthcare and Consumer Discretionary sectors.

The Global Industry Classification Standard (GICS) is the industry standard that assigns a company to a sector and industry group. This standardization makes it easy compare companies to others in the same sector (apples to apples if you will). For example, the Royal Bank, Visa, and PayPal are all part of the Financial Services sector.

The 11 Standard Stock Market Sectors and their associated industries:

1. Basic Materials – This sector is comprised of companies involved in the discovery, extraction, and processing of raw materials such as rare and precious metals, chemicals, fertilizers and timber.

1. Chemicals
2. Construction materials
3. Containers and packaging
4. Metals and mining
5. Paper and forest products

2. Communication Services – This sector includes companies that provide global telecommunication services (both wired and wireless), media, entertainment, and interactive media and services.

1. Diversified telecommunication services
2. Entertainment
3. Interactive media and services
4. Media
5. Wireless telecommunication services

3. Consumer Discretionary – This sectors refers to goods and services that are mostly non essential wants rather than needs (as found in Consumer Staples).

1. Auto components
2. Automobiles
3. Distributors
4. Diversified consumer services
5. Hotels, restaurants and leisure
6. Household durables
7. Internet and direct marketing retail
8. Leisure products
9. Multiline retail
10. Specialty retail
11. Textiles, apparel and luxury goods

4. Consumer Staples – The counter to Consumer Discretionary, companies in this sector provide goods and services that consumers always need. The ups and downs of the economy, like recessions, generally do not have much impact on the companies in this sector. For this reason, this sector is considered a defensive sector – share prices tend to grow slowly, but the companies typically pay a dividend.

1. Beverages
2. Food and staples retailing
3. Food products
4. Household products
5. Personal products
6. Tobacco

5. Energy – This sector includes companies that explore, produce, refine, and supply oil, natural gas, coal, and other consumable fuels.

1. Energy equipment and services
2. Oil, gas and consumable fuels

6. Financial Services – includes banks, asset managers, financial research and data companies, credit services, investment brokerage firms, stock exchanges, and insurance companies.

1. Banks
2. Capital markets
3. Consumer finance
4. Diversified financial services
5. Insurance
6. Mortgage REIT
7. Thrifts and mortgage finance

7. Healthcare – this sector generally holds steady through the ups and downs of the economy. The healthcare sector includes companies in biotechnology, diagnostics and research, drug manufacturing, and health information services.

1. Biotechnology
2. Healthcare equipment and supplies
3. Healthcare providers and services
4. Healthcare technology
5. Life sciences tools and services
6. Pharmaceuticals

8. Industrials – Planes, trains, but not automobiles (consumer discretionary). This sector includes aerospace, companies that produce machinery, defense firms, hand-held tools, industrial products, and transportation services.

1. Aerospace and defense
2. Air freight and logistics
3. Airlines
4. Building products
5. Commercial services and supplies
6. Construction and engineering
7. Electrical equipment
8. Industrial conglomerates
9. Machinery
10. Marine
11. Professional services
12. Road and rail
13. Trading companies and distributors
14. Transportation infrastructure

9. Real Estate – This sector includes equity real estate investment trusts (REITs) and real estate management and development.

1. Equity real estate investment trusts
2. Real estate management and development

10. Technology – This sector also includes companies that make computer equipment, develop and support computer operating systems and applications, data storage products, networking products, semiconductors, and components. Many of the market disrupters and high growth companies can be found in this sector.

1. Communications equipment
2. Electronic equipment, instruments and components
3. IT services
4. Semiconductors and semiconductor equipment
5. Software
6. Technology hardware, storage and peripherals

11. Utilities – This sector is comprised of heavily regulated companies responsible for basic public services and amenities, including water, gas and electricity. This is typically a defensive sector thanks to the stable dividends and decreased volatility of companies in this sector.

1. Electric utilities
2. Gas utilities
3. Independent power and renewable electricity producers
4. Multi-utilities
5. Water utilities

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What are market caps?

Another term you may have heard thrown around is market cap. Market cap is short for market capitalization which is what you get when you multiply a company’s number of shares outstanding (the number of a company’s shares that are traded on the market) by its current market price per share. For example, if ABC Company had one billion shares and the shares were being traded at $20, ABC Company would have a market cap of $20,000,000,000 and be considered large cap company. As the share price of ABC company moves up or down, it’s market cap will increase or decrease accordingly.

Companies are grouped according to their market capitalization. Here are the commonly used market cap size categories:

Term	Market Value
Mega-cap	> $200 billion	The largest companies in the world; well established market leaders with recognizable brands; tend to grow slower and least risky of all the market caps because of their massive market cap size; large daily trading volumes.
Large cap	$10 billion – $200 billion	Usually well known, mature companies with a proven record of stable revenue and earnings. They are large enough to normally provide less risk and volatility for investors. They are less volatile than smaller cap companies. They have large daily trading volumes.
Mid cap	$2 billion – $10 billion	These companies are often in the early stages of growth and tend to be riskier and more volatile than the larger market cap companies, but typically less risky than smaller cap companies. They offer a higher growth potential than larger cap companies. They have decent daily trading volumes.
Small cap	$300 million–$2 billion	Generally younger with major growth potential, however, they are riskier and more volatile than companies with larger market caps. Many institutional investors do not invest in small cap companies due to the risk.
Microcap	$50 million – $300 million	These companies are often relatively unknown and may have lower daily trading volumes than the bigger market cap companies. They have greater volatility and risk than larger companies. Getting information about these companies is not always easy.
Nano cap	< $50 million	These companies are often the most volatile and risky, with low daily trading volumes and higher susceptibility to market fluctuations. Often referred to as ‘penny stocks’ because pricing tends to be a few bucks or less. They are typically traded ‘over the counter’ or on smaller stock exchanges.

 

Keep in mind that market cap size categories can vary slightly depending on the source and context, and they are not absolute thresholds. Additionally, the size of a company’s market cap does not necessarily reflect its quality or investment potential.

Market capitalization is another thing to consider when planning a portfolio as it provides a quick estimate of a company’s overall value. The larger a company’s market cap the less volatile it tends to be. This does not mean a mega cap company like Amazon will not have big drops (it does) but the larger the company the more stable its revenue and earnings tend to be.

To minimize risk an investor may want to limit their stock purchases to companies with a market capitalization greater than $5 billion. This will ensure they avoid the more volatile small cap and smaller companies.

I am mainly interested in medium and larger cap companies with a few small cap companies with good potential (all companies started small at one time) and the occasional micro cap. I avoid penny stocks as its hard to determine the quality of the company and its chance of success, making them too high a risk for me. Why risk your money when there are so many excellent quality companies available?