Introduction to Investing in Individual Stocks and ETFs
How does one get started investing in individual stocks?
The short answer to this is, talk to your bank and they can tell you what you
need to do.
Investing in stocks requires an investor to open up a stock trading account
with a broker. Don't be intimidated, it's not much harder than opening up a
checking account. After the account is opened you can trade the stocks very
easily either through an internet page or telephone.
Many investors enjoy picking their own stocks. They rely on a
variety of sources including investment books, newspapers, investment oriented
television programs, stock newsletters, web sites, their own fundamental research
and other methods. These investors usually trade through self-directed accounts
at one of the major Canadian banks. Any bank branch can assist you in opening
such an account. Once the account is opened investors are given passwords to
trade stocks through an internet site, or they can phone in their trades. These
accounts are referred to as discount broker accounts. The trading commission is
low but the discount broker does not provide any trading advice, it is strictly
do-it-yourself. However, they do provide some generic stock research on their
web sites.
Other investors prefer to rely on the advice of a broker when picking stocks.
For this service an investor needs to open a full-service brokerage account.
Most of the major Canadian banks offer this service as well. There are also some
independent brokerages.
How is investing in stocks different than investing in stock mutual funds?
A stock mutual fund is a group of stocks. Mutual funds provide a way of
making a diversified investment in the market or in a certain industry segment
of the market without having to pick individual stocks. An advantage of mutual
funds is that they allow invests to put small amounts of money into the market
such as $100 per month. A possible disadvantage of mutual funds is that they
charge management fees which reduce the return. Many investors believe that they
could do better by going into individual stocks and avoiding the mutual fund
management fee.
How much money is needed to get started investing in individual stocks?
The commission to buy a stock in Canada is generally a minimum of about
$30 The same $30 usually applies for purchases from 1 to 1000 shares (for
amounts over 1000 shares, the commission usually rises above $30). A typical price for
most stocks on the Toronto Stock Exchange is between about $10 and $100 per
share, although with many exceptions outside that range. Given a $30
commission, an investor would generally want to be buying at least $3000 worth
of shares to keep the commission at 1%. At $2000, the commission is 1.5% and
that might also be reasonable at times. Below $1500 worth of stock, the
commission rises above 2% and that would seldom be affordable unless the
investor was very confident the stock would soon rise in price. Given that an
investor would generally want to hold more than one stock, a realistic minimum level to
get started is in the order of $10,000.
Can RRSPs and Registered Education Savings Plans be Invested in Stocks?
Absolutely, yes. Many Canadians hold mutual funds and guaranteed investment
certificates in their RRSPs and RESPs. Your bank can move these assets into a
self-directed trading account if you wish. After that you can contribute cash to
the self directed RRSP or RESP and then invest the cash in stocks. You can also
sell mutual funds (but ask first about penalties for selling) or cash in the
investment certificates as they mature.
Are Individual Stocks Too Risky to Invest In?
This depends on each investors individual circumstances, knowledge level and
ability, with the help of advisors, to pick appropriate stocks. An exploration
of other articles on this site may provide some insight. All investors should
work to improve their knowledge levels, in order to make better decisions
regarding risks and potential rewards in the markets.
What about Exchange Traded Funds (ETFs)
Exchange traded funds like mutual funds except that they are bought and sold
like stocks. They are usually managed in a "mechanical" fashion by simply
tracking an "index' such as the Dow Jones Industrial Average. They tend to have
very low management fees.
What Particular Stocks or Exchange Traded Funds Should You Invest In?
That is an excellent question! There are thousands of stocks to choose from
just in Canada and thousands more in the U.S. and around the world.
Traditionally stock investors used to rely on a full service broker who would
provide advice as to which stocks to buy and then would arrange to buy those
stocks for you, if you agreed. Full service broker services are offered by the
major Banks and by some independent brokerages. Many full service brokers will
not open an account with less than $100,000 invested and many require $500,000.
Most investors today use discount brokers. All of the major banks offer
discount brokers where you can trade by telephone or internet. The trading fees
are dramatically less than for full-service brokers but no individual advice of
any kind is provided. The on-line brokers do however typically over buy / sell
ratings on a large number of stocks. These do-it-yourself investors also often
select stocks based on recommendations they see on television shows like Report
On Business Television and many other shows.
Many do-it-yourself investors also subscribe to one or more Stock Newsletters
or paid Stock Advice internet sites.
Our Stock Ratings service includes a report that
details specific Exchange Traded Funds for Canadian to invest in.
Why Subscribe to a Stock Newsletter or paid Stock Advice Web Site?
There are some good Stock Newsletters in existence that have long track
records of providing good advice. (There also some bad ones out there).
Increasingly many of these services are available on-line. A legitimate Stock
Newsletter or Stock Advice Site offers a way for many subscribers to share the
cost of expert advice. The advice provided is not tailored to any particular
individual but rather is "generic" advice. A legitimate Stock Newsletter or
internet Stock advice Site is usually totally independent of the stocks being
recommended. (In contrast, much of the research that is provided free of charge
has been paid for by the companies being recommended or other conflicts of
interest exist.)
Do-it-yourself investors can easily save 2% in hidden management compared to
the costs of using mutual funds. A Stock Newsletter or Stock Advice Web Site can
be very economical. One or two good services can easily be purchased for
something in the range of $100 to $400 per year. If this independent sound
advice can be accessed in this way it may allow do-it-yourself investors to feel
comfortable buying stocks which then can avoid thousands annually in mutual fund
fees. You may wish to consider our Stock Ratings service.
Why Not Just use Free Research Sources?
Free research has often been paid for in some way by the companies being
recommended or there is some conflict of interest involved. Also free research
may be voluminous and scattered all over. In contrast a Stock Newsletter or
Stock Advice Web Site is usually presented in a concise easy to follow fashion,
so that the investor can follow the advice quickly and easily. Reluctance to pay
for a Stock Newsletter or Stock Advice Web Site may be a case of being "penny
wise and pound foolish".
END
Shawn Allen, CFA, CMA, MBA, P.Eng.
InvestorsFriend Inc.
www.investorsfriend.com
Last modified August 30, 2007