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- Introduction to Trading
- How to Buy Stocks in Canada
How to Buy Stocks in Canada
For residents and citizens of Canada, buying Canadian shares can be done through a reputable regulated Canadian stockbroker or an international multi-asset broker such as IFC Markets.
In addition, Canadian stock exchanges trade in Canadian dollars, so you need to have an understanding of how foreign currencies work, and it is also important to consider currency conversion costs when trading Canadian stocks. Let's go ahead and explore what are the minimum steps needed to achieve your goal.
How to Buy Stocks in Canada
Traders will need to do some heavy lifting before buying stocks in Canada, it can seem intimidating, so in this article we are going to guide you through important steps that come in handy when buying shares; like, what moves stock prices, creating own trading strategies, research stocks you want to buy and of course, follow the stock price chart, but also you will need to open online trading account, know when to buy or sell shares.
1. Learn What is Stock Trading
Stock trading has gained popularity, especially with the advent of online trading platforms. More and more people are starting to trade on a virtual exchange - compared to traditional methods, online trading is easier and more affordable.
Until recently, the Canadian stock market was a less significant stock market compared to other global stock markets. But today, the TSX lists more oil, gas and mining companies than any other stock exchange — it ranks 8th among the world's stock markets by market capitalization.
Stock trading is the buying or selling of shares. This process is based on daily price fluctuations, in which short-term profits are prioritized over long-term ones. A stock trader is a person who buys and sells stocks and makes financial investments in the stock market.
The key feature of stock trading is that the trader does not own real shares, but profits from the difference in price. Shares are traded through CFD. This contract implies a cash settlement, without buying a real share, and uses derivative contracts to pay for the difference between the opening and closing quotes of transactions.
2. Learn What Moves Stock Prices
As a result of market forces, stock prices change every day. This implies that stock prices change due to the struggle of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people want to sell shares than buy them, the price will fall.
Understanding the impact of supply and demand is simple. What's really hard to understand is why people like certain stocks and dislike others. In the end, it comes down to understanding which news for the company is positive and which is negative. There are many solutions to this problem and almost every investor has their own ideas and strategies for this.
Here are the main technical reasons that lead to stock price fluctuations, which can be divided into two groups:
- General political and economic factors
- Private factors
General Political and Economic Factors
The global and regional political situation is current or impending wars, local conflicts, political instability, elections or other change in the ruling regime, major political scandals.
Global financial and economic situation. It includes regional or local economic crises or their threat, fundamental decisions of the IMF, meetings of the Big Seven, economic forecasts of leading expert institutions regarding the development of the world economy.
The financial and economic situation in large industrialized countries - the collapse of large banks or monopolies, the decline or rise in production in certain industries, the financial or economic policies of governments and central banks.
An important factor influencing exchange rates is the situation in the labor market (% unemployment). There is a fairly clear relationship between them. Namely, if the unemployment rate increases (i.e., the number of jobs decreases), then exchange rates rise and vice versa.
The fact is that with a reduction in the number of jobs, the costs of enterprises decrease. In addition, with a sufficiently high level of unemployment, there is less pressure on entrepreneurs to increase wages (the unemployed are ready, in principle, for lower wages).
Another factor in this group is the ratio of exchange rates to each other, primarily to the US dollar. Changes in exchange rates against each other primarily affect exports and imports, i.e. ultimately on the profits of enterprises.
Private factors
The economic situation in this narrow industry, associated with domestic consumption and exports.
Economic and financial performance of a particular company for the reporting period and their forecast for the near future. The results of the company's activity for the reporting quarter extremely strongly influence the prices of their shares. Usually, especially in a volatile stock market, even with good results, stock prices can drop heavily if the actual performance is slightly worse than expected.
Rating of the firm on the national or world stage.
These ratings are periodically published by numerous banks, insurance companies and financial institutions. If any reputable financial institution lowers its rating, the stock exchange, as a rule, immediately reacts to this with a drop in the share price. As the rating increases, the rates most often also increase. However, negative results affect rates in general more strongly than positive ones.
A merger or acquisition of one firm by another.
If one firm buys another, then the share price of the first usually falls, and the second grows.
3. Create Your Own Trading Strategies
There are plenty of great and proven trading strategies out there that will save you time looking for the ones that work. Many traders spend a lot of time and money looking for a great trading strategy, but in some cases creating your own strategies can be fun, easy, and surprisingly fast.
To create a strategy, you will need access to charts showing time frames for trading, an inquisitive and objective mind, and a notepad to write down your ideas. Then you formalize these ideas into a strategy and "visually test" them on other charts.
Place and Time
Before you can create a strategy, you need to narrow down your chart options.
- Are you a day trader, swing trader or investor?
- Will you be trading on the 1 minute time frame or the monthly time frame?
- Be sure to choose a time frame that suits your needs.
Then focus on which market will you be trading: stocks, options, futures, forex, or commodities? Once you have chosen the time frame and the market, decide what type of trading you would like to do.
As an example, let's say you decide to look for stocks on the one-minute timeframe for day trading purposes and want to focus on stocks that move within a range. You can run a stock verification program for stocks that are currently trading within a range and meet other requirements such as minimum volume and pricing criteria.
Stocks change over time, so run new screens as needed to find stocks that meet your trading criteria when the old stocks no longer trade according to your strategy.
Creation and Testing of Strategies
Creating a strategy that works makes it much easier to stick to your trading plan. For example, suppose a day trader decides to look at stocks on the five-minute timeframe. They have stocks selected from a list of stocks created on the stocks screen that have been checked against certain criteria. On this five-minute chart, they will look for opportunities to make money.
The trader should watch the rise and fall of the price to see if anything has accelerated these movements. Indicators such as time of day, candlestick patterns, chart patterns, mini-cycles, volume and other patterns are evaluated.
Once a potential strategy is found, it's worth going back and seeing if the same has happened for other moves on the chart. Was it possible to make a profit for the last day, week or month using this method? If you are trading the five minute time frame, keep looking only at the five minute time frame, but look back in time and at other stocks that have similar criteria to see if it would have worked there as well.
4. Follow the Stock Price Chart
Once you have determined the set of rules that would allow you to enter the market for profit, it is worth looking at the same examples and see what your risk would be.
Determine what your stops should be on future trades in order to profit without stopping.
Analyze the price action after the entry and see where the stop should be placed on your charts.
When you analyze moves, look for profitable exit points. Where was the ideal exit point, and what indicator or method could be used to capture the majority of this move?
When considering exits, use indicators, candlestick patterns, chart patterns, percentage retracements, trailing stops, Fibonacci levels, or other tactics to help you profit from the opportunities you see.
Depending on how often you want to look for strategies, you can look for tactics that work for short periods of time. There are often short-term anomalies that allow you to make consistent profits. These strategies may not last longer than a few days, but they can also be used again in the future.
It is essential to keep a diary of all the strategies you use and include them in your trading plan. When conditions become unfavorable for a certain strategy, you can avoid it. When conditions favor a strategy, you can capitalize on it in the market.
5. Know When to Buy or Sell Shares
To know when to buy or sell shares an investor should:
- Be able to distinguish profitable companies from unprofitable ones, successful ones from unstable ones.
- Know how to calculate the value of shares to buy successful and profitable companies.
- Never buy shares of unprofitable and unstable companies, even if everything points to a good deal.
- It is correct to determine the moment when it is more profitable to buy shares of successful companies - wait until they fall in price and purchase them in your portfolio.
- At the same time, it is important to keep cool against the backdrop of negative pressure from the media and stock analysts.
- When stocks start to rise, fight the urge to sell them as soon as possible. We need to let profits grow.
- Understand when is the best time to sell stocks. It is best to do this at the moment when a new profitable investment has appeared or the financial performance of the company itself has begun to fall.
This is what a practical investment management algorithm looks like. Let's look at some points in a little more detail.
When to Buy Shares
That is, if you find shares of a successful company, and they are already in growth mode, do not rush to buy them, it is better to wait until they fall in value and prices correct. Or if the stock will be in a sideways trend for a long time, provided that the company's net profit continues to grow from year to year.
When to Sell Shares
The emergence of a more attractive investment is the case when you bought shares of a successful company, made some profit, and then noticed that the shares of an equally successful company, albeit from a different industry, began to fall during the year. You sell shares of the previous company - in whole or in part - and buy shares of a new company that promise good growth.
This does not apply to companies that have been losing money for many years - such shares should never be bought. You should also be wary if a company that used to be successful, after you bought its shares, began to report losses. Perhaps there are problems that you are not yet aware of. In this case, it is better to reduce positions in it or even sell all purchased shares.
A decline in a company's financial performance is a situation where a company begins to report losses from quarter to quarter or declares a large loss in excess of last year's profit. In order to find out about the problem in time, the investor must monitor the reporting of companies on a quarterly basis.
If net income, long-term debt, equity, as well as your stock chart is deteriorating, and the prices on the chart are falling, then it's time to sell stocks. If prices remain at the same level, the shares can be held for now.
6. Research Stocks You Want to Buy
If you're looking for that piece of information about a company that will tell you whether a stock is a winner or not, you'll be disappointed. It doesn't work like that at all.
Equity research requires the collection and analysis of multiple data points in order to find the equity investment that suits your needs. But you are doing this to justify or disprove a stock, not to give a specific correct answer to the question of whether you should buy or sell.
Every public company operates differently, and every equity investor has their own unique financial goals and interests. Stock research helps you make up a story about the finances and business practices of a public company and how these things can make stocks right for you.
There are several steps you can follow if you want to select stocks using fundamental analysis. First, keep in mind that you must analyze both the qualitative and quantitative aspects of the industries and individual companies that make up your chosen industry.
Qualitative Factors
Company's news
News about the company you want to invest in can cause the share price to rise or fall. This is because good news often makes people buy stocks, while bad news makes them sell stocks. This affects supply and demand and, ultimately, the share price.
Personnel changes. Personnel changes, including management restructuring, are extremely relevant for those who are looking for shares, because it affects the perception of the company by the market. The reputation of a business can be affected by any personnel changes that directly affect share prices.
Financial events
When choosing stocks, it is important to consider financial events as they can cause market uncertainty and increased volatility. Economic events include interest rate decisions, planned management changes and major events such as Brexit.
Quantitative factors
Income Reports
Traders and investors should closely monitor changes in a company's earnings as part of their fundamental analysis. If a company's earnings fall and the share price does not adjust to the new level of earnings, the company's share price may not reflect true value.
Company balance
The company's balance sheet will list all of its assets and liabilities. A stronger balance sheet usually means a higher share price because it reflects potential earnings. As already mentioned, earnings also directly affect share prices.
Dividends
Dividends are the portion of a company's profits that it decides to return to its shareholders. This is one of the ways a shareholder can make money from investments without having to sell shares. You can use dividends as a deciding factor when choosing stocks because they indicate that the company is profitable and that there is a good chance of future earnings.
Coefficients
Qualitative factors can be measured using various coefficients. Fundamental analysis ratios include:
- A price-to-earnings (P/E) ratio that measures the value of a stock by showing you how much you have to spend to make a $1 profit. The P/E ratio helps compare the value of one stock in a sector with another. It can also be used as a guide to determine if a company is currently overvalued or undervalued relative to its historical averages.
- Debt to Equity (D/E) ratio, which measures a company's debt in relation to its assets and gives you an idea of how the company is performing in relation to its competitors. A low ratio may mean that the company receives most of its funding from its shareholders. It is important to note that the ratio of "good" or "bad" depends on each specific industry.
- Return on equity (ROE), which measures a company's profitability in relation to its equity capital and is expressed as a percentage. This shows you if the company is generating enough income relative to the shareholder's investment.
- Total return, which measures earnings by dividing earnings per share (EPS) by the share price. Overall returns are also a measure of value—the higher the returns, the more likely a stock is undervalued.
- Relative dividend yield, which measures a company's dividend yield compared to the index as a whole. If you want to buy stocks, you must consider the relative dividend yield because it can show whether a stock is overpriced or underpriced relative to competitors' stocks.
- The current ratio, which measures a company's ability to repay debt. It shows whether the liabilities can be adequately covered by the available assets. There is a relationship between this ratio and the share price. The lower the current ratio, the higher the likelihood that the share price will continue to decline.
- Price-earnings-to-growth ratio (PEG), which measures the P/E ratio compared to the percentage growth in annualized EPS. If you are deciding which stocks to choose, you should consider the PEG ratio as it can give you an idea of the fair value of the stock.
- The (P/B) ratio measures the current market price in relation to the company's book value. A ratio above one often indicates an overvalued stock.
7. Open an Online Trading Account
First you need to fund your trading account. It stores the trader's funds for further use. If an individual does not have a brokerage account, it is recommended to open one, it will take several minutes. It is not necessary to replenish the account immediately - the trader can freely move around the account to get acquainted with the platform interface. When you're ready to start trading stocks, you can deposit funds into your account.
Suppose a trader has chosen a broker and wants to open an account. To do this, follow these steps:
- Open the official website of the broker and fill out the registration form to open an account.
- Choose a convenient payment method to replenish your account.
- Go through the verification process if necessary.
- Select an asset and start trading directly through the online trading platform.
Bottom Line on How to Buy Stocks in Canada
To buy stocks in Canada or anywhere else traders need to practice a careful methodical approach.
Learn the basic rules of stock trading in Canada, create and test strategies you plan to use, always follow stock price charts, study stocks historical prices as well. More importantly research stocks you want to buy with that try to assess what will affect and has affected your chosen stocks price. And lastly, learn when it's okay to buy or sell shares.
