So, you want to learn how to buy stocks?

We know the world of investments can be daunting at first. But if you are reading this, there is no doubt you have an itch to understand more about equity trading and how to participate in the world of capital markets.

Before we learn how to buy stocks in Canada, it’s imperative that you actually know what a stock is.

If you already know what a stock is and are just interested in buying stocks on your own, you can skip this part.

Regardless if you are purchasing stocks in a TFSA, RRSP or margin account, purchasing stocks without first knowing what you are buying is like purchasing a car with a manual transmission with no knowledge of how to drive it.

You want to learn how to drive the car before you start cruising around downtown Toronto.

So what exactly is a stock?

A simple yet loaded question, of which there are a plethora of answers that can inundate even the bravest of souls. The image above summarizes why a company would issue stock.

Investing for beginners is an intimidating task. Before you dive into buying stocks, it’s absolutely crucial you know what a stock is.

Simply put, a stock provides you with certain rights – such as voting in shareholder meetings, earning a portion of dividends and the right to sell your shares to a third party.

However many people have told you, stocks DON’T give you this:

Owning shares in a company does not give you rights to assets of a corporation

This is a common misconception.

In the eyes of the law, an organization is treated as a separate entity (a person).

As a result, the tables and chairs that one would see in a Royal Bank are owned by the company, not the shareholders.

This is known as separation of ownership and control.

O.k. I know what a stock is, now tell me how to make millions buying stocks!

Buying stocks is pretty easy, regardless of where you are situated in the world today.

Now, it gets a little more complicated when you want to buy stocks without a broker, and we get asked this a ton.

The fact is, it’s going to be a lot easier for you to buy stocks with a brokerage.

You simply sign up with a discount broker online or even a broker from a big bank such as RBC Direct Investing.

From there you simply fund your account and purchase the shares you want.

Aspiring investors shouldn’t be asking how to buy stocks, but this:

The real question aspiring investors should be asking themselves is:

how do I buy GOOD stocks?

Any person over the age of 18 can simply open a brokerage account and start purchasing stocks. But without proper knowledge, they will go broke.

Many falsely assume that investing is all about luck, others who call themselves experts would argue that it’s about having an innate ability.

All such claims couldn’t be further from the truth.

Yes, investing is an art to a certain extent, but it is also a science – a skill that can be learned with repetition and practice.

There’s one key piece of knowledge you need to know in order to pick good stocks to buy

Before we commence with details of the stock picking process, it is imperative to understand the forces that drive the stock market.

A stock market is a marketplace where you buy and sell stocks.

Thus, the value of those stocks in the stock market is determined by the forces of supply and demand, forces which are a function of the market’s view and firm’s need for capital.

In other words, if the price of a stock is rising, the market is showing optimism in that stock.

This is possibly THE biggest concept investors looking to buy stocks on their own take too literally

Stocks go up and down every day.

As we know, supply and demand is the main driving force in the stock market.

But you must understand what is driving supply and demand.

Let’s give a quick example. You head to a comic book store and are looking at a limited edition Superman comic that the owner insists is only one of 10 in the world.

Now, you can imagine in a world of 7 billion people, if there is ten of anything it’s considered rare.

You go ahead and pay a fortune for this book. When you get home you are shocked to see there is in fact 10 000 copies, not ten.

The value of your comic is now essentially worthless.

The main driving point in this example is that you must dig into the reasons why the stock is going up. Unfortunately, there are a lot of stocks that go up due to hype and unreasonable expectations.

Not convinced? How about this real life example that crippled millions.

In the early 2000s the market believed based on anecdotal information and asinine valuations that tech stocks were to be highly valuable.

These beliefs led to the creation of a bubble and ultimately, a crash.

If you’re going to beat the market online investing, you NEED to understand this concept

The intrinsic value of a stock is the amount the stock should be worth on the market.

The intrinsic value of a stock may or may not be the same as its market value. It could be higher, resulting in a profitable buying situation.

Or, it could be lower. This presents an opportunity to dodge a bullet and avoid purchasing the stock. Or even better, it can tell you when to cut the cord on a stock you currently own.

That is exactly why there is money to be made in the stock market!

If your analysis is good, your intrinsic value calculations will be correct and you will know whether a stock is overvalued or undervalued.

The key is knowing how to calculate intrinsic value.

How does one determine the intrinsic value of a stock? Short answer – by developing the right mindset and doing quality research.

This article is directed towards stock investing for beginners. So we aren’t going to go crazy in depth on intrinsic value.

Instead, Investopedia has a great article about calculating intrinsic value here.

This investor picks stocks like a businessman, and he’s worth over $70 billion dollars

To be good at picking stocks you need to think like a businessman, not a stock picker.

We have proof that such a mindset works, proof worth $70 billion – net worth of Warren Buffett.

The greatest investor of our time thinks of himself as a businessman, not an analyst or a stock picker.

Warren Buffett has often made claims that the Intelligent Investor by Benjamin Graham was the best investing book he has ever read.

Finding good stocks to buy requires key research into the industry itself and not just a single stock

When it comes to research, the first step is to understand that a good industry does not mean a good stock.

A rising tide may lift all ships, but a weak ship will go down into the abyss sooner or later.

Case in point – Noodles and Company, listed on the NASDAQ.

Even though fast casual dining is popular among Americans, shares of Noodles and Company have been falling since its initial public offering in 2013.

That being said, just because you are learning how to buy stocks in Canada and the USA does not mean that a weak or strong industry here is the same in other parts of the world.

You want to learn how to buy stocks that are going to be the next Amazon, Microsoft or Apple? Read on young Jedi

Stocks need a catalyst to move, which is a double-edged sword because the price can move in either direction.

Examples of good catalysts are a change in regulations, an acquisition of a company, higher than expected earnings etc.

If you are learning how to buy stocks specifically in Canada, you’ve probably been keeping a keen eye on cannabis stocks. Most (not all) Canadian cannabis stocks moved considerably due to change in government regulations.

These companies have human beings behind them, and a smart group makes a massive difference

Case in point, Monster beverage corporation had an excellent marketing strategy, which allowed it to maintain a long period of hyper-growth and provide lucrative results. This isn’t by chance. Management got them to where they are today, and management can sink a company just as easy. We will go over this later in the piece.

When learning how to buy stocks on your own, it’s easy to fall into this trap:

When beginners are learning to invest, a buy and hold strategy isn’t the first thing on their minds.

We get it. It’s boring, it’s old, it’s lame. But you know what?

It works

Beginners often look to invest in highly volatile growth stocks to try and beat the market.

Why? More often it is a case of over confidence and the new investors falsely acquired ability to beat the market.

The next Facebook and Apple are out there, but it is highly unlikely that you will discover these diamonds in the rough before the industry experts.

By experts, we mean individuals who are involved in the nitty-gritty of the industry because of their professions.

Learn how to buy stocks that will provide long lasting returns, like the ones below.

To become good at investing, one needs to do the heavy lifting i.e. quality research. If that is not your cup of tea, the next best option is to invest in blue chip stocks.

These stocks are large, established and financially sound firms that have existed for long periods of time.

When teaching people how to buy stocks, we often preach Canadian bank stocks. They are a great long-term investment. These banks are protected by mammoth, almost impenetrable barriers to entry because of Canadian Banking Regulations.

The industry is like an oligopoly, and Canadian banks make a handsome profit each year, which in turn means great returns for investors via consistently rising stock prices and dividends.

Buying too many blue-chip stocks can be considered “too safe” by some, and we’ve got reasons why

While it is good to have blue-chip stocks in your portfolio, a portfolio can really maximize its returns if you choose to dive into some speculative areas.

We aren’t advocating to go out and gamble, but if you are a brave heart, unafraid of grappling with research and numbers, it is best to follow a structured approach to stock selection.

The first step – run a screen based on certain investment criteria.

How to buy stocks and skyrocket your returns using a stock screener

Screening a stock is a way of separating the wheat from the chaff.

Numerous screening tools are available online, such as Morningstar and Zacks, which allow you to perform this operation with utmost ease.

Because we are obviously learning how to buy stocks in Canada, it would be inappropriate to not include a great TSX screener.

TMX Money is the best in the business in our opinion.

That being said, it’s not about swinging the hammer, it’s about knowing where to hit.

But like everything in life, all ratios are not made equal – it is best to focus on a few instead of making your life difficult with hundreds that provide little additional value.

Here is a stock quote from Imperial Oil using Questrades IQ Platform. You can reference this picture when looking over these terms, as most stock quotes will include them.

PEG and P/E ratio

The go-to ratio for almost everyone in the industry, a comparison of the firm’s stock price against its actual earnings (P/E stands for price-to-earnings). We go in depth on the P/E ratio in this article.

Ratios on their own are pretty useless, you need an appropriate yardstick for comparison.

A good choice would be the industry average. The P/E ratio for the firm that you are interested in might be 30, which is extremely high. However, if the industry average is 60, your stock is a steal, provided it is sound in all other areas.

An ingenious enhancement of the P/E ratio is the PEG (price-earnings-growth) ratio. As a rule of thumb, look for companies with a PEG close to 1.0, which implies that the market’s expectations are based on realistic assumptions about the firm’s growth prospects.

Let’s assume that the P/E ratio of a firm is 10, and the expected growth rate is 5%. In this case, the PEG is 2 (10 divided by 5). Even though a P/E of 10 might be low compared to industry average of 15, the PEG raises a huge red flag.

Return on equity (ROE)

The net income earned expressed as a percentage against shareholder investments.

Plain English: A measure of the management’s ability to use money invested in the business. If you want to beat the market, a ROE of at least 10% is essential.

Debt-to-total capital

An extremely important ratio. Too much debt can cripple a business during tough periods, eventually leading to bankruptcy.

Furthermore, this ratio is a good way to gauge the management’s claims. For instance, they may claim that they are going to double their business by borrowing money from banks. But if the D-E ratio is 2, no bank will extend a loan to the firm. Look for firms with D-E less than 0.5.

Institutional ownership

Percentage of stocks owned by big institutions such as mutual funds, pension funds, endowments, hedge funds or other large investors.

There are two ways to look at this metric. High institutional ownership means that big analysts are confident about future prospects of the company.

But this also limits upside as the stock is not ‘hidden’ from big players. Around 50% institutional ownership is the sweet spot.

Earnings per share (EPS)

Provides an assessment of the company’s historical profit growth rate. 5-10% growth is healthy.

Business Size

Size of the business will determine the classification of the stock. Anything less than $200 million will fall in the small cap/penny stock category.

Smaller companies are more risky. If you are interested in investing in penny stocks, check out our article on what exactly a penny stock is.

Other non-numerical screening factors include:

Geographic location – Companies in developed nations are more stable as compared to those in developing nations.

Business Sector – Sectors such as tech are inherently more risky as compared to other sectors.

You’ve ran your screens. You’ve got your stocks. Here’s what you need to do next

After running the screen, the next step is to read the company’s financial statements.

These are usually available on the Securities and Exchange Commissions website, or in the company’s annual reports.

Three key documents will be available to you that you need to utilize.

• The balance sheet
• The profit and loss
• The cash flow statement

Of these three, cash flow statement is the most important for two reasons.

Cash is king when it comes to business. If a firm does not have enough cash, it will go down sooner or later.

Second, cash cannot be ‘cooked’ like the balance sheet or profit statement. If the firm is trying to fool investors by showing a good cash flow financed through high-interest loans, those numbers will be evident on the statement.

How to buy stocks by digging a little bit deeper

Now you can relax and take a break from the numbers. It’s time for qualitative analysis.

Start with the quality of the management, something very hard to assess but probably the most important.

A good management or CEO can make or break the company. McDonald’s would not be a multi-billion dollar fast-food chain if it weren’t for Ray Kroc’s vision. A good place to start is the historical performance of the management.

How the heck do I know what a good management team looks like?

An excellent way to learn about the company, and develop your own business and analytical skills, is to listen to the conference calls, where management of the company answers analyst questions and discusses its pain points and future plans.

If you were to follow the advice thus far, you would be better than 90% of investors out there. New investors are prone to mistakes though, and nobody will ever be perfect.

Picking the right broker to buy stocks in Canada

Knowing the destination is not enough, you need a vehicle to reach the final point.

Buying and selling stocks requires a broker, this is our theoretical stock market vehicle.

In fact, you can learn most stock market basics right from your brokerage. Take for instance Questrade. They have numerous courses and learning oppurtunities available right on your desktop or phone.

This is why it may be a good idea to open a brokerage account even before beginning your research because most brokerages provide tools that can be conducive to research.

Choosing the correct online brokerage is key, and you need to get it right

Selecting a good broker is a research project in itself. Some have unnecessarily complex interfaces that can confuse and frustrate even the most seasoned investor.

However, we’ve made the decision somewhat easier by picking apart the top 5 brokerages in Canada and the USA.

Because we are investing online, we personally prefer online brokers. They provide a no-frills and fast approach to investing.

Discount/Online brokers

As already mentioned, these are the simplest of all categories of brokers. They are order takers and not in the business of providing advice. For those who are uncomfortable with using an online terminal, an option to order over the phone is also available. Keep in mind this is usually at a huge cost.

Online broker with assistance

As the name suggests, these are discount brokers that provide advice, which is a little less than full service consulting.

These brokers usually provide monthly newsletters and investing tips, and may provide more research options as compared to a straight discount broker.

For a person beginning to invest, all the numbers and charts can be highly intimidating, but just keep practicing and you will be a master in no time.

Full-service broker

These are the traditional kind that has existed since the early stages of the industry. Their job is to assess your financial situation, perform comprehensive research and provide recommendations. In other words, they do the heavy lifting for you.

Keep in mind this also implies that you trust them to have advanced analytical and research skills. You should try your best to verify this prior to investing with one.

Money managers

Not really a broker, but worth a mention as most people confuse them to be one.

First, to invest with money managers, you need a hefty amount of capital.

Second, you are not really in control of making investment decisions. Everything will be done by the manager.

There are some excellent money managers out there, who provide substantially better returns than the market.

However, as mentioned before, you need to have a significant amount of capital and be willing to pay mammoth management fees.

Buying stocks requires knowledge of these crucial brokerage terms.

Sigmund Freud had to create his own terminology to explain ideas of psychology to the world. The same is true for brokers, they have their own lingo which may be confusing for a beginner learning how to buy stocks. Hence, it is best to learn some of the common terms.

Bid and ask

Think of an auction, the price that the seller requires is the ask, and prices that the buyers are willing to pay are bids (or bid for a single buyer).

Spread Short

For the bid-ask spread – is the difference between the highest bid and the lowest ask price. Lower the spread, more liquid the stock.

Last but not least, these order types are absolutely crucial to know prior to purchasing a stock

Market Order: A buy or sell order that is to be completed instantly at the current market price. This is the simplest of all order types, and is best used when speed is more important than price.

Limit order: Opposite of a market order – price is more important. The goal is to buy or sell a stock at a certain price. A buy order is executed at a certain price or lower, whereas a sell order is executed at a certain price or higher.

Stop-loss: A valuable risk-management function. This is an order to sell a security if it reaches a certain price. Novice investors are highly encouraged to use this feature.

Stop-limit order: A hybrid that combines the features of stop-loss and limit orders. When a certain price is reached the stop-loss turns into a limit-order – set to buy or sell a security at a certain price. As you may have surmised by now, this will require you to set two price points.

Well, you’ve done it. You should know how to buy stocks by now

Congratulations! If you have read this far, you are no longer a beginner! Buying and selling stocks is an exciting endeveur and you won’t regret it if you follow the correct steps.

A word of caution though when you start investing. Start small, real small. Don’t be worried about missing an opportunity, they have existed throughout history and will continue to do so into the future.

Once you get into the thick of things, that is, online stock trading or investing, do analysis and learn more. You will be reeling with great investment ideas.

For some, learning how to buy stocks is just too daunting and time-consuming. All they want is the market return, or a little more.

In that case, exchange-traded-funds (ETFs) or Robo-Advisors like Wealthsimple are great options. ETFs invest in multiple securities which lead to diversification and thus, lowering of risk.

We hope this article helped you gain an understanding of investing in the stock market and how to buy stocks in Canada. Please feel free to share this article and like us on Facebook.

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