So you are a Canadian looking to put some money to work for yourself in the stock market. Or perhaps you’re a foreign investor and you like the value that the Canadian markets hold. The good news is you are almost certainly in the right place. But you may need a bit of guidance on the way there. This report is intended to frame the ways that stock investing in Canada is just a little bit different than stock investing elsewhere.
The Canadian capital markets are dominated by the Toronto Stock Exchange, or the TSX. According to a recent report from Edward Jones, the annual rate of return for the S&P/TSX Composite Index (TSX) was 9.3% per year between 1960 and 2020.
That comes in about the same as the U.S. S&P 500, which has returned an average of 10.9% over the past 50 years, buoyed by a recent decade that was stellar, boasting a 13.9% return.
Why Invest In Canadian Stocks, Anyway?
So why invest in Canadian stocks instead of the U.S. stock market? It’s time to become familiar with a very popular phrase in the world of stock investing: “Past performance is no guarantee of future results”. That means exactly what it says: just because an investment is going one way does not mean the trend will continue.
Being vigilant about changing conditions and reassessing your portfolio against them is one of the keys to being a better investor in any market. Take the rise and subsequent result of COVID-19. Over the past twelve months, Would you rather own a telehealth stock or a stock that owns a collection of commercial real estate properties? The answer is self-evident now but you might have been extremely confident in the latter in January of 2020. Staying on top of the winds of change is key.
That’s why one portfolio manager thinks Canada is set to outperform the United States in the years to come.
“The S&P 500 has outperformed the TSX in nine out of the past 10 years: since the depths of the financial crisis, the S&P 500 has outpaced the TSX by over 300%,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management told Advisor’s Edge recently, adding: “But the tide is turning and the case for the TSX over the S&P 500 is about as positive as I’ve seen since the end of the 2005 oilsands boom.”
Jerusalim says low interest rates, a “super-cycle” of mergers and acquisitions, money sitting on the sidelines, and key industries that could breakout all favour Canada.
“There is a clearly good case to be made for why the TSX could finally begin a period of outperformance relative to its southern counterpart,” he concluded.
How To Buy Your First Stock In Canada
So the first question you are really going to ask yourself about how to invest in Canadian stocks is literally “How are you going to invest in Canadian stocks?”. I’m being a little coy here. I mean to say that the landscape of making a trade in Canada has changed drastically over the past decade. Back in the day, you would call up a stock broker named Tom or David (Okay Gordie or Dougie, it is Canada after all) and that person would recommend some stocks to you. His fee might be three per cent when you buy and another three per cent when you sell.
But as the realities of the digital age set in, people began to do more research on their own, making that fat commission a little less palatable.
Cue the move to low fee, online brokerages.
“Independent brokerages such as Questrade and Wealthsimple as well as services offered by major Canadian banks have seen sharp spikes in customers joining their platforms, with one industry official saying half a million new accounts were created in the first quarter of the year, reported BNN Bloomberg reporter David George-Cosh last year.
With an independent broker you sign up online much the same way you would create an account to shop for clothes or electronics. The process is the same and you can often be trading within hours or days. You will need to provide a government issued ID, your social insurance number, stuff like that. Then, you need to decide what kind of account you want to open. There are a few. You may want to start with a Tax Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), which will offer you some tax advantages. Last but not least you will have to get some money into your account. Again, standard stuff. Most will take a wire or eTransfer or a cheque or you can add the broker as a payee, the way you would pay a bill. So, which is the best online broker in Canada? According to MoneySense, it’s Questrade, which charges one cent per share you trade. Others ranking highly were National Bank Direct Brokerage and TD Direct Investing, which charges $9.99 per trade.
How to Buy Stocks In Canada: Making A Trade
So when does a trade happen? When you log in to our account and you want to buy a stock you’ll be asked to identify the name of the company or enter the ticker symbol. Once you pull that up you’ll be shown a chart of “Market Depth”. This will be all the bids (they’re buying) and all the “asks” on the other side. A trade happens when the two meet. Say you open up this table and the highest bid is $2.50 and the lowest ask is $2.55. If you own the stock and want to sell it, you can simply do so at $2.50. This is called “hitting the bid. If you do not own the stock and want to buy it, you can buy it at $2.55. But let’s say you think you can get a little bit of a deal. If you bid $2.51 you may tempt a seller into hitting your bid? Not happening? Try $2.52 and so forth. Think the stock is going to go down tomorrow? Maybe you bid $2.30 for it and wait. There’s an art and a science to buying stock and part of the fun of investing is learning how to buy and sell.
Figuring Out The Jargon
Price to earnings ratios. Dividends. Mergers and acquisitions (M&A). “Bought deals” (a Canadian innovation, by the way), Market capitalization or “market cap”. The capital markets has a language all its own, but this doesn’t have to intimidate you. Here’s what you need to do: read, read, read. Read press releases from stocks you might be interested in and highlight words or phrases you don’t know. There’s a helpful site called Investopedia you can load these terms into and it will tell you what they mean. But don’t get too bogged down in jargon.
What you need to figure out is the “why” of investing. Why is one stock a buy and another a sell? How much of my money should I put into one stock? For these answers there is one book that has been proven to give you a leg up on other investors. Go to your favourite bookseller and buy it right now, it’s called “The Intelligent Investor” and it was written by legendary investor Benjamin Graham. Graham is known as the father of what is called “value investing”. He’s also the mentor of a little investor you may have heard of by the name of Warren Buffett.
So what does “The Intelligent Investor” teach you? A lot of things, really, but mostly figuring out the inherent value of a company and then comparing it to the price of the stock. Ben Graham teaches you how to block out the noise of investing (and trust me, there is a lot of noise) and how to focus on finding truly undervalued stocks.
How To Buy Canadian Stocks: SIZE Isn’t Everything, & How To Avoid Scams
In the United States there is a very well established tradition of venture capital firms investing early in companies and providing subsequent rounds of financing designed to support them as they grow. Some of the most noted names in the United States began this way, including Facebook. Peter Thiel, the social network’s first big investor turned a half million bucks into a billion this way.
Google, Twitter, Zoom, Zynga and Alibaba have similar origin stories. They had VC money that kept them from going public until they were relatively well established companies.
Canada does not have the same tradition. Sure, we’ve got a few venture capital firms that have invested early in companies but they have nowhere near the presence that American firms enjoy.
So what does this mean? It means that Canadian companies go public way earlier than their U.S. counterparts. Like, way earlier. Down south, you may have heard of companies waiting to turn a profit before going public. In Canada, some companies go public before they have even generated revenue. This means two things, one good, one bad. First the bad news. There are a lot of stocks that are straight up scams in Canada. Pump and dumps. “Story stocks”. You will have to learn to avoid them. Fortunately, there are some telltale signs. The first thing to know is that they are always in flashy sectors. Crypto, weed etc. You get the idea. After you read Ben Graham you won’t fall for them, you will simply look at the balance sheet and compare it to “Mr. Market (a little preview of Ben Graham’s book here) is asking for it. So what’s the upside of
How Canadian Stocks Are Different
You’ll notice we have a lot of resources, and resource stocks. You will see that our top five banks control much of the total market and have reliable dividends. You will also notice that with our telecom companies. But there is one key aspect of investing in the Canadian markets that is often overlooked, even by experienced investors here.
Okay, quick, think of some stocks in the United States off the top of your head. Time’s up. I’ll bet you said one or more of Apple, Facebook, Amazon, or Netflix, right.
That is something that is very, very different than up in The Great White North. Canadian investor Ron Shuttleworth crystallized the idea at a tech conference and our Nick Waddell reported it in these pages.
The Canadian tech scene is often regarded as more staid and less sexy than that of our southern cousin, and Shuttleworth explained why.
The single biggest difference between techs north and south of the border is this: the American tech scene is presided over by consumer facing companies such as the aforementioned Apple, Microsoft and Facebook. They dominate headlines and are what most people immediately think of when they think of tech. In Canada, to an almost complete degree, the best tech companies are enterprise facing; they work behind the scenes and are better known to businesses than they are to the average guy or gal on the street. Sure we have BlackBerry and Shopify. Those are the exception to the rule. Ever heard of Descartes Systems Group? Constellation Software? WELL Health Technologies? No?
These are “ten-baggers” and beyond over the past few years. Invest your money in any of them a few years ago and you would be very happy today. Follow the steps we discussed in this article and you will have a better chance of finding a hidden gem of a Canadian stock for yourself.