Investing Basics: How To Buy Stocks

Understanding How to Buy Stocks for Your Portfolio

Stocks are a fundamental part of a well-rounded investment portfolio. They offer long-term growth potential, and learning how to invest in stocks is an important first step. Historically, stocks have outperformed other asset classes, with an all-stock portfolio generating an average annual return of 10.1% between 1926 and 2018, according to Vanguard.

1. Open an Account for Stock Investments

A brokerage account is the most straightforward way to start buying stocks. If you're interested in exploring the stock market and prefer to make decisions on your own, an online brokerage account can be a great starting point.

For those looking to enhance their purchasing power, margin accounts may be an option. A margin account allows borrowing money from the brokerage to buy more shares. While this can potentially increase gains, it comes with additional costs and a higher level of risk, suitable only for experienced investors.

Direct Stock Purchase Plans

If specific companies have already caught your attention, a direct stock purchase plan (DSPP) may be a suitable alternative. These plans allow you to buy stock directly from the company without needing a brokerage account. Though not every company offers DSPPs, many well-known names do.

Be aware that while DSPPs may provide the opportunity to buy shares at a slight discount, they often come with additional fees. With the prevalence of low- and no-fee brokerage accounts, DSPPs are less common today. Carefully weigh the potential benefits against the costs before opting for a DSPP.

Full-Service Brokers

Full-service brokers offer a wide range of services, from financial planning to tax and estate management, and can assist with stock purchases. However, these brokers typically charge higher fees than online platforms.

For those with more complex financial needs or larger portfolios, a full-service broker may be worth considering. However, if your primary goal is to buy stocks, an online brokerage or direct purchase plan may be more efficient and cost-effective.

Robo-Advisors

Robo-advisors, which offer automated, low-cost portfolio management, can also provide a hands-off way to invest in stocks. These platforms often include diversified stock portfolios, and while they do charge a management fee, they simplify the investing process by handling the buying, selling, and rebalancing for you.

Exploring Stock Investment Strategies

Robo-advisors can still be a good option for those who prefer a more hands-off approach. However, if the goal is to focus solely on stock purchases, other methods may be more suitable.

2. Researching Stocks to Invest In

With thousands of publicly traded companies available, choosing which stocks to invest in can feel overwhelming. A good way to simplify this is by using a clear strategy, such as focusing on growth stocks or building a portfolio of dividend stocks.

• Growth stocks: These belong to companies experiencing rapid increases in revenue or profits. Typically, they are younger companies or those in expanding markets. Investing in growth stocks is based on the expectation that continued high growth will lead to significant price appreciation over time.
• Value stocks: These stocks are considered to be undervalued by the market. Value investors seek "bargains" by looking for stocks priced below their intrinsic value, often indicated by lower price-to-earnings (P/E) or price-to-book ratios.
• Dividend stocks: These are stocks of companies that distribute part of their earnings to shareholders as dividends. The goal here is to generate a steady income from dividends, regardless of stock price fluctuations. Certain industries, such as utilities and telecommunications, are known for consistent dividend payouts.

Use a Stock Screener

Finding the right stocks can still be challenging, even with a strategy. Stock screeners can help by narrowing down your options based on specific criteria. Nearly all online brokers provide access to stock screeners, and there are also free versions available online. You can use filters such as market cap, sector, or P/E ratio to identify stocks that align with your investment preferences.

3. Executing Trades

Once you have selected the stocks you want to invest in and funded your brokerage account, the next step is to execute the trade. When placing a stock order, you'll need to choose the order type:

• Market order: This instructs the broker to purchase the stock at the current available price. Keep in mind that the price shown may change by the time the order is executed due to market fluctuations.
• Limit order: With this option, you set the price you’re willing to pay, and the order will only be executed if the stock reaches that price within a specified time frame. If the stock doesn’t hit the target price, the order is canceled.

If stock prices are high but your account balance is small, consider buying fractional shares. This allows you to invest in expensive stocks, such as Tesla (TSLA), with smaller amounts of money. Not all brokers offer fractional shares, but platforms like Wealthsimple and Interactive Brokers provide this option in Canada.

4. Dollar-Cost Averaging

Stock prices are always fluctuating, making it difficult to predict the best time to invest. Dollar-cost averaging addresses this issue by investing a fixed amount of money at regular intervals, regardless of the stock's current price. This strategy helps smooth out the cost per share over time, reducing the impact of market volatility.

For example, using dollar-cost averaging, you might buy shares at $5, $10, and $9 over three weeks, averaging $8 per share. This approach helps avoid the risk of buying all at once at a higher price.

5. Timing Stock Sales

The best time to sell stocks is when the funds are needed. A long-term investment strategy should focus on financial goals and when it is necessary to access the funds.

Short-term fluctuations in the market or a stock’s price should not dictate when to sell, especially for long-term investors. Instead, the focus should be on the initial investment rationale. If nothing has fundamentally changed about the company, short-term price drops might even be opportunities to buy more.

Understanding Capital Gains Tax

When stocks are sold for a profit in Canada, 50% of the capital gains must be included as taxable income. Be sure to account for this when planning to sell any investments.