Topic: How To Invest

Discover How to Invest in the Canadian Stock Market for Gains

Learning how to invest in the Canadian stock market starts with deciding on the approach and types of investments you’ll need to make for profits

By seeking investment quality and following sound investment principles (like the 3-part Successful Investor approach), you increase your chances of finding superstar stocks that move faster than the market average. These stocks, as leaders in their economic sectors, are also more likely to emerge first from a down market. In other words, there is no fundamental contradiction between making your investments safe and achieving substantial gains.

The fundamentals of how to invest in the Canadian stock market are the same for newcomers as they are for established, successful investors. The challenge for everybody is to stick to what works and not let investment fads, the media limelight or bad advice from a broker or advisor steer you off course.

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Use the bottom-up approach as you find out how to invest in the Canadian stock market; that approach will give you bigger, more secure profits

We think that most investors are far better off with “bottom-up investing” as opposed to “top-down investing.” Bottom-up is where you look closely at individual stocks and single out those with a history of sales and earnings, not to mention dividends. Then you buy a diversified, balanced selection of stocks that represent prosperous businesses with a strong hold on their markets.

We advise you to invest this way within the framework of our three-part Successful Investor portfolio strategy (see below for more on this)

Over periods of five years and beyond, top investment honours generally go to a member of the bottom-up investing crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferrals and lower brokerage costs.

Make it a priority to understand dual-class shares when you are learning how to invest in the Canadian stock market

In the situation of dual-class shares, if a company’s two classes trade for roughly the same price, you’re better off buying the voting shares. That’s because the voting shares may move substantially higher than the non-voting shares if a shareholder who is trying to take control of the company accumulates a large number of shares. In addition, for companies with dual class shares, their voting shares sometimes trade above their non-voting shares because certain institutions refuse to buy non-voters, or only buy them in limited quantities.

Canadian stocks sometimes combine their voting and non-voting dual-class shares into a single share class to make themselves more attractive to investors (particularly institutional investors) who dislike non-voters. When that happens, the voting shares may get a 10% to 20% premium over the non-voting shares in return for sharing control of the company. So, if you can buy the voting shares of a dual-share company for less than, say, a 5% to 10% premium over the non-voting shares, it can be a worthwhile investment.

Note that most Canadian stocks with dual-class shares have far fewer voting shares outstanding, and they trade far less actively than the non-voters. However, for long-term investing, having a vote is more valuable than a high level of liquidity, since the voting shares will tend to trade at or above the non-voters.

That’s why we recommend that you buy the voting shares when they trade at roughly the same price or less than the non-voters.

Understanding how to invest in the Canadian stock market involves knowing the difference in market and limit orders

A market order is an order to buy or sell a specific number of shares at the best price available when you place your order. In contrast to limit orders, market orders are almost always filled within a very short period of time—in minutes, if not seconds.

However, you only learn the price you paid (for a purchase) or received (for a sale) after the order is filled. The market price may change, for or against you, between the time you place the order and when it is filled.

In general, most investors should use market orders when buying or selling widely traded shares. That’s because the market-order risk of occasionally paying too much is more than offset by the limit-order risk of missing out on your best ideas.

Our three-part Successful Investor portfolio strategy: Learn how to invest in the Canadian stock market by following our approach to sound investing:

  • First, invest mainly in well-established, dividend-paying companies, since they are the companies most likely to keep making, if not increasing, those dividend payments each year.
  • Second, spread your portfolio out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities. That way, you increase your chances of stumbling on a super stock that goes up five to 10 or more times faster than average. A few of these can make an enormous improvement in your long-term investment results.
  • Third, limit your exposure to stocks that are in the broker/media limelight. That limelight bloats investor expectations. When stocks fail to live up to those expectations, big downturns often follow, regardless of a company’s dividend history.

What is the biggest obstacle you faced when you were just beginning to invest?


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