{"id":6637,"date":"2022-05-24T15:05:31","date_gmt":"2022-05-24T22:05:31","guid":{"rendered":"https:\/\/www.nerdwallet.com\/ca\/?page_id=6637"},"modified":"2024-09-03T14:02:06","modified_gmt":"2024-09-03T21:02:06","slug":"investing-for-canadian-beginners","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/ca\/investing\/investing-for-canadian-beginners","title":{"rendered":"Investing for Canadian Beginners"},"content":{"rendered":"\n

<\/a> When you\u2019re new to the world of investing, it\u2019s tough to know where to begin. Do you pick your account first \u2014 or your broker? Do you take the DIY route or opt for an automated service? And how are you supposed to know what kind of investments to pick?<\/p>\n\n\n\n

Beginners investing in Canada should start the process by exploring the basics:<\/p>\n\n\n\n

    \n
  1. Learn the difference between saving and investing<\/a>.<\/li>\n\n\n\n
  2. Figure out how much you want to invest<\/a>.<\/li>\n\n\n\n
  3. Pick a strategy that\u2019s right for your financial goals<\/a>.<\/li>\n\n\n\n
  4. Review your investment options<\/a> so you can build wealth with confidence.<\/li>\n<\/ol>\n\n\n\n

    Investing 101: What is investing?<\/h2>\n\n\n\n

    Investing is the act of committing your money to something in the hopes of getting back more than what you put in. You can invest in all sorts of things \u2014 businesses, real estate, stocks and other asset classes<\/a> \u2014 but none of these are guaranteed ways to make money. Businesses fail, markets shift, and stocks can lose value. That\u2019s why investing is risky.<\/p>\n\n\n\n

    More than three-quarters (77%) of Canadians have investments, according to a BMO Financial Group study[1]<\/a>, and one of the easiest ways to invest is through a dedicated account you use exclusively for your assets. These accounts are available through financial service providers called brokerages<\/a>. All of the biggest banks in Canada are registered investment brokerages, but you can also invest through third-party brokers.<\/p>\n\n\n\n

    Saving versus investing<\/h3>\n\n\n\n

    Saving and investing aim to build a financial safety net but approach the goal differently. When you save<\/a>, you’re putting money away somewhere safe so you can use it sometime in the next few years. When you invest, you’re buying an asset and accepting some risk in the hopes that it will increase in value.<\/p>\n\n\n\n

    For example, the money you put in a savings account has a guaranteed interest rate<\/a>, which means that any funds you deposit will earn money, no matter what. Savings accounts interest rates are variable, so the rate at which your money grows may fluctuate \u2014 but it\u2019s still guaranteed. Plus, you don\u2019t run the risk of losing what you deposit. Investments, on the other hand, rarely come with a guarantee, so there\u2019s no way to know if you\u2019ll turn a profit \u2014 and there\u2019s a chance you could lose some or all of the money you invest.<\/p>\n\n\n\n

    So, why not stick to savings accounts? Well, the average rate for high-interest Canadian savings accounts<\/a> in 2022 is 1.29%, according to NerdWallet analysis. And the total return of the S&P\/TSX Composite Index, which broadly represents the Canadian stock market, averaged 8.68% over the last ten years. That 7.39% difference in profit is your potential reward for taking an investment risk.<\/p>\n\n\n\n

    You can see the real impact when considering how most Canadians use their tax-free savings account (TFSA). According to BMO\u2019s 2022 annual savings study[2]<\/a>, more than half of Canadians (63%) have a TFSA, but most of these accounts (56%) hold uninvested cash. In some cases, cash makes up over 75% of account holdings. Now, that may not seem particularly noteworthy \u2014 isn\u2019t cash what savings accounts are for? Well, yes. But TFSAs are capable of holding investments and cash. Only about half of Canadians (49%) know this \u2014 the rest are missing out on some serious tax-free earning potential.<\/p>\n\n\n\n

    Tucking funds into a savings account means guaranteed interest, but investing may offer exponentially higher returns. That said, investing won\u2019t be right for everyone. There are a few factors beginners should consider before they start investing.<\/p>\n\n\n\n

    Back to the Top<\/a><\/p>\n\n\n\n

    What to consider before you invest<\/h2>\n\n\n\n

    If you\u2019re new to the world of investments, here are three questions beginners should consider:<\/p>\n\n\n\n

    1. Do you have high-interest debt?<\/h3>\n\n\n\n

    Not all types of debt<\/a> are created equal. From 2019 to 2021, variable and fixed-rate home loan interest rates in Canada ranged from 1.46% to 5.58%[3]<\/a>. Compare that to the average interest rate for a Canadian credit card<\/a>, which is 19.4%, according to NerdWallet analysis, and you begin to see just how widely debt interest rates can vary.<\/p>\n\n\n\n

    Carrying high-interest debt, like credit card debt<\/a>, can wipe out the money you earn on your investments.<\/p>\n\n\n\n

    For example: let\u2019s say you invest $100 and one month later, your investments generate a 10% return. You\u2019re now $10 richer. Except you also happen to owe $1,000 on your credit card, which carries a 20% interest rate. Your investments brought in $10, but you just generated $16.60 of interest on your credit card, transforming your $10 gain into a $6.60 loss.<\/p>\n\n\n\n

    Not all debts cost the same. You don\u2019t need to be debt-free to start investing, but take stock of any debts owed and prioritize paying down high-interest debt before opening an investment account.<\/p>\n\n\n\n

    2. Do you have an emergency fund?<\/h3>\n\n\n\n

    An emergency fund<\/a> holds money earmarked for unexpected expenses, like car repairs or sudden job loss. Many financial experts suggest saving three to six months of living expenses, but any amount helps, especially when you\u2019re starting out.<\/p>\n\n\n\n

    Establishing an emergency fund before you start investing may provide some peace of mind. Because even if your investments perform poorly, you have a monetary safety cushion in place to fall back on.<\/p>\n\n\n\n

    3. Do you have money you can afford to lose?<\/h3>\n\n\n\n

    While some investments are riskier than others, no investment can guarantee profit. Money invested should be money you\u2019re willing to lose \u2014 in part or entirely, as both are possible.<\/p>\n\n\n\n

    Plus, some lower-risk investments, like bonds and guaranteed investment certificates (GICs)<\/a>, require you to set aside your funds for months or years at a time. Money invested should be money you\u2019re willing to leave untouched for some time.<\/p>\n\n\n\n

    Back to the Top<\/a><\/p>\n\n\n\n

    Pick your investment strategy<\/h2>\n\n\n\n

    Before you can learn how to start investing<\/a>, you\u2019ll need to explore some potential investment strategies. An investment strategy guides your decisions and can help you determine how to assemble a collection of investments: an investment portfolio.<\/p>\n\n\n\n

    Investment strategies can be broadly divided into three options:<\/p>\n\n\n\n

      \n
    1. Investing with a financial advisor<\/a>.<\/li>\n\n\n\n
    2. Investing with a robo-advisor<\/a>.<\/li>\n\n\n\n
    3. Investing on your own<\/a>.<\/li>\n<\/ol>\n\n\n\n

      Each path offers a distinct set of perks and drawbacks.<\/p>\n\n\n\n

      Financial advisor: Hands-off investments managed by a human<\/h3>\n\n\n\n

      If you\u2019d prefer to park your investments with a professional, a financial advisor may be the way to go. Investment management services \u2014 sometimes called wealth advisory services \u2014 are offered by all of the major financial institutions in Canada. With this strategy, a financial advisor builds and manages your investments on your behalf.<\/p>\n\n\n\n

      This strategy is best for investors who don\u2019t want to manage their own investments and prefer the human touch of a financial advisor.<\/p>\n\n\n\n

      Robo-advisor: Hands-off investments managed by an algorithm<\/h3>\n\n\n\n

      Some brokerages offer access to an automated investment service called a robo-advisor. Despite the name, this service isn\u2019t administered by a robot, but it is made possible by sophisticated investment algorithms.<\/p>\n\n\n\n

      Here\u2019s how it works:<\/p>\n\n\n\n

        \n
      1. First, you fill out an online application to open an account.<\/li>\n\n\n\n
      2. Next, you answer a series of questions about your financial goals and how much risk you\u2019re willing to take with your investments.<\/li>\n\n\n\n
      3. Then, the robo-advisor puts together a portfolio on your behalf based on your questionnaire responses.<\/li>\n\n\n\n
      4. The robo-advisor uses complex algorithms to monitor your account, moving investments in and out of your portfolio according to your financial goals. This technique is called portfolio rebalancing.<\/li>\n<\/ol>\n\n\n\n

        This strategy is best for investors who don\u2019t want to manage their own investments and feel comfortable entrusting their money to a digital service.<\/p>\n\n\n\n

        Self-directed: Pick your own investments<\/h3>\n\n\n\n

        For those that want full control over the investing process, self-directed investing, or DIY investing, may be the best way to go. This approach involves opening an account with an investment brokerage and putting together a portfolio of your choosing. You\u2019ll also be solely responsible for monitoring your investments and making adjustments over time as needed.<\/p>\n\n\n\n

        This strategy is best for investors who want to manage their investments firsthand and don\u2019t mind the extra homework that often comes with managing a portfolio solo.<\/p>\n\n\n\n

        Nerdy tip:<\/strong> By the way, you\u2019re not locked into just one investment strategy. You can have multiple investment accounts with different brokerages and are free to experiment with other techniques as you see fit.<\/p>\n\n\n\n

        Back to the Top<\/a><\/p>\n\n\n\n

        How much do I need to start investing?<\/h2>\n\n\n\n

        Whether you have $100 or $10,000, how much you need to start investing largely depends on the type of investment service you use (if any) and what types of investments you put in your portfolio.<\/p>\n\n\n\n

        Many brokerages in Canada don\u2019t have account minimums, which means beginners can start investing with any amount. There may be other minimums to contend with, though.<\/p>\n\n\n\n

        For example, some wealth management services in Canada impose portfolio minimums, which means you need to have a minimum amount available to invest through the service.<\/p>\n\n\n\n

        Another common minimum that investors bump up against is minimum investment amounts for certain types of investments, like mutual funds. You typically need at least $500 to invest in a mutual fund.<\/p>\n\n\n\n

        Nine types of investments<\/h2>\n\n\n\n

        What you put in your portfolio matters because it impacts your potential for profit and loss. Investments, also called assets, come in many shapes and forms:<\/p>\n\n\n\n

          \n
        1. Stocks.<\/strong> A stock is a slice of ownership in a company, also called a share, that is bought and sold by investors on a stock exchange.<\/li>\n\n\n\n
        2. Exchange-traded funds.<\/strong> Also called ETFs<\/a>, these funds combine the funds of multiple investors to invest in a basket of assets \u2014 typically stocks and bonds.<\/li>\n\n\n\n
        3. Mutual funds.<\/strong> These funds also pool investor funds and hold multiple investments. Unlike ETFs, mutual funds<\/a> are often actively managed by a fund manager. Mutual funds are the most popular (42%) asset in Canadian RRSPs.[1]<\/a><\/li>\n\n\n\n
        4. Bonds.<\/strong> A bond is a lump sum loan from an investor to a company or government that earns interest and is paid back over a set length of time. Bonds are a popular type of fixed-income investment<\/a>.<\/li>\n\n\n\n
        5. Derivatives.<\/strong> These assets derive their value from another asset\u2019s volatility<\/a>, like the price movement of a stock. The two most common types of derivatives are options and futures.<\/li>\n\n\n\n
        6. GICs<\/strong>. Guaranteed investment certificates<\/a> are similar to bonds: you lend your money to a financial institution for a set period of time in return for your investment back, plus interest, at a later date.<\/li>\n\n\n\n
        7. REITs<\/strong>. Real estate investment trusts are companies that own real estate. You can invest in REITs by purchasing shares \u2014 just like a stock.<\/li>\n\n\n\n
        8. Forex.<\/strong> The foreign exchange market, or the FX market, allows investors to buy and sell international currencies.<\/li>\n\n\n\n
        9. Crypto.<\/strong> The cryptocurrency market lets investors buy and sell digital currencies<\/a>.<\/li>\n<\/ol>\n\n\n\n

          How to invest in stocks<\/h3>\n\n\n\n

          Stocks are a popular investment. In fact, they\u2019re the second most popular asset following mutual funds[1]<\/a>. Learning how to invest in stocks<\/a> comes with its own challenges and rewards, so stocks tend to be one of the riskier investments for beginners.<\/p>\n\n\n\n

          If you\u2019re keen to learn the stock trading ropes, do your research and carefully vet any company you intend to invest in. Take a look at its financial records, stock performance and how it fares against major competitors before you buy shares.<\/p>\n\n\n\n

          Back to the Top<\/a><\/p>\n\n\n\n

          Canadian investment account options<\/h2>\n\n\n\n

          Canadian investment accounts can be broadly lumped into two categories: registered and non-registered.<\/p>\n\n\n\n

          Registered investment accounts<\/h3>\n\n\n\n

          Registered accounts are offered by Canadian government programs and come with tax benefits \u2014 although your deposits and withdrawals are limited.<\/p>\n\n\n\n

          Examples of registered investment accounts include:<\/p>\n\n\n\n