Recently i was asked on how to trade. Too be honest I totally forgot that this might be the biggest step anyone can do that wants to build a portfolio and unless they have someone to show them they may not know how to start.
So were going to breakdown the steps to do so.
Your going to have to decide what type of trading account you would like. Here are a couple suggestions and the differences between the accounts. There are more accounts you can choose from however I currently don’t use those accounts and one day if I do I’ll share about those. If your just starting out either one of these two accounts is a great place to start.
- Self directed RRSP
This is a registered account meaning if you place money into this account you will get a tax rebate at tax time on what you put in however when you pull money out you will have to pay taxes on that money, the percentage of the rebate depends on your tax bracket on the way in and on the way out. You can use this account to buy and sell stock. Most investors that I follow use this account for growth companies however everyone has a different strategy.
2. Self directed TFSA
This is by far my favorite account, I will get into why in a moment. The TFSA account is a non registered account meaning if you put money in you will not receive any tax breaks at tax time however when you pull out the money you don’t pay taxes on any of it. This may be the best thing the government has done for us in this specific industry. You can reinvest aall dividends if you choose and also pay no taxes as long as the company is on the Canadian stock market. If you decide to purchase a US stock you will have to pay taxes on the dividends but not from the capital gains if I recall correctly. The contribution amount vary’s depending on your age (Please do your due-diligence) and it’s very important that you know how it works. For ex. Lets say you just turned 18 and your max contribution amount is only $5,500, you decide to put in the full $5,500. Later on in the year you pull out $3,000 as you need the money and then later in the year you have $3,000 to put back to work. Do not put it back in the TFSA account until the following year, the reason i say this is if you place that $3,000 into the account before the year is out you now have put in $8,500 when your max contribution amount is $5,500. The government will come after you for it and will make you pay a tax on the over contribution. TFSA was introduced in 2009 so if you turned 18 after 2009 look up your max contribution which is a simple google search. Now to why this is my favorite account. One day when your time has come and one of the only things you left behind is this account, the full amount will go to who you left it to tax free. The RRSP account does not give you this. Most investors purchase there income companies in here (Higher dividends) however again everyone has a different strategy.
Now that you’ve decided on which account you’d like to open, you will need to decide which broker to use. I would check around as there are many good ones out there. For simplicity of this I will share who i use and why.
My reasons are very simple. They have some of the lowest fees per trade in Canada. Why would you want to pay more for a fee if you don’t have too? Most of my trades cost me about $5. If you choose to sign up for Questrade that’s great. Here is my pin that you can enter in when signing up and get yourself a minimum of $25 to a maximum of $250 of free cash (306621331398010).
Before you trade i would suggest that you take advantage of the watch list on the trading page on Questrade. You can make multiple watchlists and can even name them. Its best to use them as different sectors. (Banks,Utilities, Communication, Oil and gas, technology to name a few). As you start to look at different companies that you like, add them to the correct sector. If your new to the stock market it may not be best to buy anything until you learn the basics. So pick up some investment books, check out some local blogs around investing and once you feel your ready then start your journey.
Making a trade
So now your ready to go and want to make your first purchase. Bring up the stock ticker and hit the buy/sell button. Enter in the quantity of shares you would like to purchase. Next you will have to decide what order type you would like to use, for beginners IMO would be either market price or Limit. If you pick market price it will buy you shares at whatever bids are available however I prefer Limit price as this way you can put in the amount per share that your willing to pay. So if you put in let’s say $25 it will fill your order at $25 or less depending who is selling on the other end but you will not pay a penny more if the order fills. Once you have decided which order type you’d like to use you will need to enter duration (How long you want your order your placing to be open for purchase), again for basic beginners use day or if you really want the stock you can put in good till cancelled which means the order could fill a week later. If the stock has not hit your target price you can go in and modify the price your willing to pay or even cancel the order all together. Now that you have put in all the info above you hit the buy button, this will pop up another window and show you how many shares you want, at what price, what the duration is, the cost of the trade which i have talked about but referenced it as fee and what the total all together adds up to. if your happy with what you see hit submit and your on your way. The same format goes for selling a stock.
Before i wrap this up here are a few lines to remember that i only wish someone told me about before I started
- Never fall in love with a stock
- Control your emotions so they don’t control how you trade
- Buy on fear and sell on greed
If you have any questions please feel free to reach out to me and I’ll help you as much as I can.
Invest in yourself