How To Buy Stocks – Forbes Advisor Canada
Stocks play a key role in your investment portfolio and learning how to buy stocks is your first job as an investor. Between 1926 and 2018, a 100% stock portfolio returned an average 10.1% a year, according to Vanguard—almost twice the return of an all-bond portfolio over the same period.
Here’s our step-by-step guide on how to buy stocks:
1. Open an Account to Buy Stock
A brokerage account is the most convenient place to buy stocks, but it’s far from your only option. If you see yourself as a hands-on investor who likes researching companies and learning about markets, an online brokerage account is a great place to get started buying stocks.
Online brokerages offer taxable accounts and tax-advantaged accounts. If you want to buy stocks to fund your retirement, consider a registered retirement savings plan (RRSP) that offers you certain tax advantages, like tax-deferred growth of your investments and contributions that can reduce your taxable income. If you’re investing for a day sooner than retirement—or you’ve already maxed out your retirement accounts—look to a tax-free savings account (TFSA). While they don’t offer tax deductions like an RRSP, they still offer tax savings on your investments growth within the account.
Your online brokerage of choice might also ask if you want to open a margin account. With a margin account, the brokerage lends you money to buy stock. This lets experienced investors buy more shares of stock with less of their own money in exchange for some additional costs and much more risk.
Direct Stock Purchase Plans
If you’re already identified stocks that you’d like to buy, you may consider a direct stock purchase plan. Not all publicly traded companies participate in direct stock purchase plans, but many of the largest, most popular names do and you don’t need a brokerage account to buy stocks this way. You’ll most likely be charged additional fees, however.
Direct purchase plans are almost always administered by third parties, rather than the companies themselves. For instance, you can buy both Costco and Coca-Cola stock directly through ComputerShare. Often, these firms charge additional fees for direct purchase plans. In contrast, most online brokers charge zero commissions to buy and sell shares of stock.
With the ready availability of low- and no-fee online brokerages, many direct purchase plans have fallen out of favor. However, they may allow investors to purchase a specific company’s shares at a slight discount, which may help make up for the fees they charge. Carefully evaluate the benefits of investing using a direct stock purchase plan before you make your first purchase.
Full-service brokers provide well-heeled clients with a broad variety of financial services, from retirement planning and tax preparation to estate planning. They also can help you buy stocks. The trouble is full-service brokers charge steep commissions compared to online brokers.
For wealthy individuals without a lot of extra time to stay on top of their complicated financial lives, full-service brokers offer special treatment as well as a high level of trust. If all you want to do is buy stocks, a direct purchase plan or an online brokerage is a better choice.
Robo-advisors are automated investing platforms that evaluate your financial goals, investing timeline and risk tolerance. When you sign up for a robo-investor, the platform asks you a series of questions to evaluate these factors and then invests your money in a managed portfolio of exchange traded funds (ETF) that’s tailored to your needs.
The thing about robo-investors, though, is that you’re not buying stocks directly—you’re buying a portfolio of ETFs. Some of those funds will almost certainly be stock ETFs, like the SPDR S&P 500 ETF Trust (SPY), which strives to match the performance of the S&P 500 stock index. But others could be broad bond funds, like Vanguard Total Bond Market ETF (BND), which invests in fixed income securities.
That doesn’t make robo-advisors a bad choice for your investing dollars, especially if you’re more of a hands-off investor. Just keep in mind that robo-advisors may not be your first choice if you just want to buy stocks.
2. Research Which Stocks You’d Like to Buy
There are thousands of different publicly traded companies offering shares of stock on the market. That makes it daunting to decide which stocks to buy. One way to think about researching the stocks you want to buy is to adopt a well-thought out strategy, like buying growth stocks or buying a portfolio of dividend stocks.
- Growth stocks are shares of companies that are seeing rapid, robust gains in profits or revenue. They tend to be relatively young companies with plenty of room to grow, or companies that are serving markets with lots of room for growth. Whether the shares of a growth stock seem expensive or not, investing in growth stocks assumes that continued rapid growth will deliver strong price gains over time.
- Value stocks are shares of stock that are priced at a discount and stand to see price gains as the market comes to recognize their true value. With value investing, you’re looking for “shares on sale,” with low price-to-earnings and price-to-book ratios. The aim is to buy stocks that are underpriced and hold on to them over the long term.
- Dividend stocks pay out some of their earnings to shareholders in the form of dividends. When you buy dividend stocks, the goal is to achieve a steady stream of income from your investments, whether the prices of your stocks goes up or down. Certain sectors, including utilities and telecommunications, are also more likely to pay dividends.
Use a Stock Screener to Find Stocks to Buy
Whichever strategy you choose, finding the stocks you want to buy can still be challenging. Stock screeners help you narrow down your list of potential stocks to buy and offer an endless range of filters to screen out all the companies that do not meet your parameters. Nearly all online brokerage accounts offer stock screeners, and there are more than a few free versions available online.
With a stock screener, you can filter for small-cap stocks or large-cap stocks or view lists of companies with declining share prices and stocks that are at all-time highs. They also generally let you search for stocks by industry or market sector. Filtering by P/E ratio is a great way to find shares that are overpriced or underpriced.
3. Execute Trades in Your Account
Once you’ve opened and funded a brokerage account and then identified stocks you’d like to buy, it’s time to execute trades in your account. Before you put in an order to buy stock, you need to understand a few details about the process—purchasing stock isn’t as simple as just pressing a buy button on an app. You’ll generally have to pick an order type, which provides instructions on how you want to purchase a stock.
Two of the most common order types you’ll have to choose from:
- Market order. This type of order instructs the broker to buy stock immediately at the lowest price available. The current stock price you see when you enter a market order isn’t necessarily the price at which your market order will be executed—prices change in milliseconds, and you’re only telling the broker to get the lowest price available.
- Limit order. You name your price, and the buy only gets executed if the stock falls to that price or lower within a selected time period. If the stock never reaches the specified price before the limit order expires, your trade gets canceled.
If you have a small balance in your account but the share prices of stocks you’re looking to buy are very high, consider fractional shares. Take Tesla (TSLA) stock, for example. As of August 2022, it is priced at $1,166 a share. With fractional shares, you could invest as little as a few dollars in the stock. Not all brokers sell fractional shares, but Wealth Simple Trade and Interactive Brokers are two popular brokers that offer them in Canada.
4. Use Dollar-Cost Averaging to Buy Stock Over Time
The trouble with stock markets is that prices fluctuate constantly. You may have your eye on a stock that looks reasonably priced today, but who’s to say whether the price will be higher or lower tomorrow?
Dollar-cost averaging provides a solution to this problem: Buy stocks with a set amount of money at regular intervals, and you may pay less per share on average over time. Crucially, dollar-cost averaging allows you to get started buying stocks right away, with a little bit of money, rather than waiting to build your balance. This mitigates the risk you buy either extremely high or low since you’re spreading out your purchases across a long period of time.
Let’s say you use dollar-cost averaging to buy your target stock at $5 a share in week one, $10 a share in week two, and $9 a share in week three. On average, you’ve paid $8 a share—better than if you had mistimed your purchase and gone all in at $10 a share, only to see the price drop. Plus, investing the same dollar amount each time would buy you more stock at $5 a share than at either of the other price points.
Buy low and sell high is a mantra for successful stock purchasing you’ve probably heard more than once. But practicing it can be psychologically challenging, and it can be very, very difficult even for experts to agree what “low” and “high” are for a given stock. Automated, recurring stock purchases that use dollar-cost averaging help you sidestep the challenge and make investing routine.
5. Think Carefully About When to Sell Your Stock
The ideal time to sell your stocks is when you need the money. Long-term investors should have a strategy centered on a financial goal and a timeline for achieving it. That means it should include a plan to start tapping your investments and using the cash you’ve accumulated when the time is right.
That also means that deciding when you should sell a stock has very little to do with what the stock or broader markets are doing at any given moment. Unless you’re day trading and looking to turn a quick profit—which is much riskier than long-term investing—you don’t even have to worry about watching day-to-day price movements.
If you’re second guessing whether you should hold onto a losing stock, think again about why you bought it in the first place and decide whether anything has fundamentally changed. If not, a dip in the price might actually be a good time to buy more.
Stock Sales and Capital Gains Taxes
If you do decide to sell your stocks, be sure you understand the tax consequences first. In Canada, when you sell the investments at a higher price than you paid, you’ll need to add 50% of the capital gain to your income tax.