How to Invest in Canada for Beginners: Tips for Easy Investing (2024)

In this article, you'll learn about the specific types of accounts available to invest in Canada, plus the pros and cons of different trading styles and asset classes. By the time you finish reading, you'll have good insight into building a portfolio of Canadian assets aligned with your personal goals.

Key Takeaway

Canada's total stock market capitalization is just over $4 trillion, making it the fourth-largest stock market in the world. Despite its relative lack of size compared to its geographically smaller southern neighbor, the Canadian markets have both unique opportunities and investment vehicles for citizens.

Overview of Investing in Canada

Investing in Canada centers around the Toronto Stock Exchange (TSX), one of the world's oldest and largest stock exchanges. The TSX is larger than the older and more prominent London Stock Exchange (LSE) in the United Kingdom. Only the United States, China, Japan and India have larger stock exchanges by market cap than Canada's TSX.

The Canadian stock market (CAD stock market for short) has many publicly traded companies, with more oil and gas companies and offshoots like the Canadian Venture Exchange than any other stock market worldwide. Additionally, Canada is home to some of the most renowned publicly traded banks, such as the Bank of Montreal TSX: BMO, the Royal Bank of Canada TSX: RBC and the Toronto-Dominion Bank TSX: TD. American investors are likely familiar with TD Bank and its investment outshoot, TD Ameritrade (recently acquired and integrated by Charles Schwab). You'll have diverse stock sectors to choose from if you want to invest in Canada.

What to Consider Before You Invest in Canada

Before starting your journey to invest in Canada, you must ask yourself a few questions. First of all, are you a Canadian citizen? Canada's financial institutions have access to markets worldwide, but only Canadian citizens can open accounts at Canadian brokerages. Citizens are also eligible for preferential tax treatment through Canada's advantaged investment accounts. Here are a few more factors to consider if you invest in Canada.

Debt

Debt can be anathema to investment, especially high-interest debt like credit cards or private loans. Before considering different types of Canadian investments, review your finances and ensure that debt isn't taking a big bite out of your cash flow. If you're paying 15% interest on credit cards and your investments return 13%, you aren't helping yourself get ahead. While paying down your debt, you can get a head start by researching Canadian business stocks or how the government of Canada influences the investment landscape. Then, when your debt and living expenses are manageable, you'll have a strong knowledge base to build your investments.

Emergency Fund

Planning for a specific emergency is futile, but accidents happen, and investors should always expect the unexpected. If you tie up too much money in stocks, you may need help getting money quickly to pay for any unforeseen emergencies. An emergency fund is a must-have before building a stock portfolio; a good rule of thumb is to save three to six months' worth of expenses before planning to invest in Canada.

How to Choose Your Investment Strategy

Market participants go into two categories: investors and traders.

How do you want to invest Canada? Ask yourself a few questions first to determine how your Canadian investment plan will go.

Step 1: Determine your time horizon.

The time horizon is the most critical factor in any investment plan. You can't control market returns, personal income or economic conditions, but you can tailor your investment portfolio based on how long you plan to stay invested. Do you have short-term financial goals like quick profits or a long-term goal like a comfortable retirement? Your time horizon will determine your path as an investor.

Step 2: Select the proper investment account.

Opening the proper account is crucial for any investor, and as you'll see below, not all Canadian investment accounts are created equal. A cash or margin account is more applicable if considering short-term investing. If you're interested in saving for retirement or a child's education, using one of the tax-deferred account types might be the better option. Consider your financial goals when deciding which type of account to open.

Step 3: Understand investing vs. trading.

Short-term investment is trading since you can measure time frames in days or weeks (sometimes hours or minutes!). If quick profits are your goal, that's trading and requires a different attack plan than long-term investing for plans like retirement savings. Consider the pros and cons of trading vs. investing before adding Canadian business stocks.

Step 4: Fund your portfolio.

How much do you plan on investing per year? The best investment plans follow a set of rules to prevent overly-emotional thinking. Money can be an emotional topic! Following pre-set guidelines for consistently funding a portfolio can maximize your gains and minimize aggressive overtrading.

Step 5: Weight your trades and investments.

Determine how much capital you want to devote to each asset class. Younger investors can take on more risk since their time horizons are longer. Still, older retirement savers may need more cash or different types of bonds in their portfolios to avoid a disastrous downturn.

10 Types of Investments in Canada

Let's take a look at the types of investments you can choose in Canada:

• Stocks: Canada has many publicly traded international companies, some of the biggest banks and oil/gas companies. Canadian stock analysts cover equities like U.S. analysts, so consider their reports when investing in Canada.
• Government bonds: The government of Canada has fixed-income securities available for investment with lower risk than stocks.
• Corporate bonds: Fixed-income securities offered by publicly traded companies are riskier than government bonds but less risky than equities.
• Guaranteed Investment Certificates (GICs): Much like an annuity, a GIC is a low-risk investment product with a return fixed to a specific index. GICs are principal-protected by the Canadian Deposit Insurance Corporation (CDIC). While returns tend to be low, they are considered less risky than bonds or stocks.
• ETFs: An exchange-traded fund (ETF) is a basket of stocks or bonds traded on an exchange as a single entity. They can be actively managed or tied to an index.
• Mutual funds: Similar to ETFs, mutual funds are baskets of stocks or bonds. Mutual funds aren't traded on exchanges; you can only purchase them at the end of the trading day.
• Options: A derivative contract gives an investor the right (but not the obligation) to purchase a stock at a certain price within a specific time frame.
• Futures: Futures are contracts where an investor bets on the future price of a particular stock, bond or commodity like oil or gold.
• Currencies: Forex trading involves buying and selling sovereign currencies. You purchase currencies in pairs; traders profit off the difference between the price of the two currencies in the pair.
• Cryptocurrencies: Digital currencies like Bitcoin and Ethereum can be legally traded in Canada, although they're largely unregulated and carry significant volatility risk.

Canada Investment Account Options

Canadian citizens have many investment accounts at their disposal, many of which gear toward retirement savers like the IRA and 401(k) accounts available in the U.S. Here are a few of the most common account types you'll find when investing in Canada.

TFSAs

The Tax-Free Savings Account (TFSA) is the Canadian equivalent of the Roth IRA in the United States. Like a Roth, a TFSA comes from money already subject to taxation. Investments in the account will grow completely tax-free.

The 2024 annual contribution limit for a TFSA is $7,000, up $500 from 2023. However, you can add unused "contribution room" from previous years to the tally. Learn more about calculating contribution room for Canadian investors opening a TFSA.

RRSPs

If the TFSA is the Canadian cousin of the Roth IRA, then a Registered Retirement Savings Plan (RRSP) is the Canadian version of a 401(k) plan. Like a 401(k) plan, the money used to fund an RRSP is tax-deductible up to a certain amount. Individuals can contribute up to $31,560 in tax-deferred money to their RRSP account in 2024, which is unchanged from 2023.

One key benefit of RRSPs is the carryforward designation, which allows unused contribution room to pass on to the next year. So, if you contribute $26,560 to your RRSP this year, you'll have an extra $5,000 to contribute the following year, making RRSPs an essential retirement planning tool for Canadian investing.

RESPs

A Registered Education Savings Plan (RESP) is another essential account when investing in Canada. RESPs help citizens pay for higher education expenses, similar to a 529 plan in the United States. Depending on their beneficiaries, individuals, families or groups can set up RESPs. There is no annual contribution limit.

However, there is a lifetime limit of $50,000 per beneficiary. RESP contributions are not tax-deductible, but the government of Canada will match a certain percentage of your contribution if you fall under particular income and contribution thresholds.

Cash Accounts

A cash account is a standard, non-tax deferred investment account where participants can trade stocks, bonds, mutual funds and ETFs. Cash account holders receive no preferential tax treatment and cannot borrow money to buy Canadian stocks or trade derivatives like options. A cash account is a good starting place when investing in Canada for beginners.

Margin Accounts

Like a cash account, no tax incentives exist when using a margin account to invest in Canada. However, a margin account allows investors to borrow money against their holdings to apply leverage to their investments. Various brokers will have different types of demands when providing margin, but margin accounts allow for trading leveraged securities like options. Short selling is also allowed in margin accounts.

How to Manage Your Investments

Let's look at managing your investments, from planning to buying and selling securities.

Step 1: Develop a plan for your trades/investments.

All investment starts with a plan. Develop a portfolio plan using information like your time horizon, risk tolerance and investing goals. Balance your asset allocation following your investment plan and consult it as needed. Financial advisors are excellent resources for developing ideal personal investment plans.

Step 2: Track your portfolio performance.

Keep up to date with the performance of the assets in your portfolio. You don't need to watch your stocks hourly like a day trader, but understand which overperforms or underperforms and ensure your portfolio stays within the guidelines in your investment plan. But if you have short-term financial goals, you'll need to track your stocks more frequently, especially if you invest in Canada small caps, derivatives or cryptocurrencies.

Step 3: Buy and sell securities based on your investment plan.

Quarterly or annual rebalancing is a step that most investors take to rein in asset classes that have gained too much weight in the portfolio. For example, if you find that your portfolio is 80% stocks and 20% bonds at the end of the year and you seek a 65/35 ratio, you'll need to sell some bonds and buy more stocks.

Don't forget about your taxes! Having to pay taxes is a good thing — it means your investments produce gains. But tax planning is a crucial step in maximizing your gains while also satisfying the government of Canada. Consider a financial advisor for tax planning purposes.

Invest in Canada to Enhance Your Portfolio

Investing in Canada is similar to investing in the United States or other capitalist countries. Many great companies call Canada home, but you'll need to be aware of the subtle differences and use all the tools at your disposal.

Ensure you open the correct type of account for your investment style and always be aware of unique market features, such as Canadian market holidays and tax laws.

Think you might want to invest in other countries after learning investing for beginners in Canada? Learn more about investing in Chinese stocks for beginners.

FAQs

Still have questions about how to invest in Canada? Take a look at some top-asked questions.