How To Invest In Canada

How To Invest In Canada

As a Canadian trying to find out how to invest in Canada, the process can seem rather daunting. Understanding all the terminology and how the different types of investments work can be overwhelming – especially if you are new to investing.

The good news is that we have compiled the following guide to help you navigate your investment journey. We will lead you through the steps you need to take and options you should consider getting started.

How to Invest in Canada

  • Start investing as soon as possible.

  • Begin with either an automated investment service or a financial advisor not associated with a bank.

  • Aim for a simple portfolio at first and expand as you gain experience.

  • Do not be discouraged if you lose money over the short term. Your investment will be meaningful in the long term.

  • If your employer offers a retirement and pension plan, take it.

  • Set up a debit order to ensure you contribute to your investment regularly.

  • Focus on the amount you can save and place into your investment account each month rather than what your return might be. At first, your contributions will exceed your return. But as the value of your total investment grows, the return will be more impactful.

People invest their money for different reasons, but most focus on providing for themselves when they retire.

It does not matter whether you are investing for the first time or want to understand more about your current portfolio. The following should help you know how to invest in Canada.

What you should know when learning how to invest in Canada

How much money do I need to invest?

The amount you require to get started differs with each investment provider. However, it is possible to open an investment account with an automated investing service before investing anything.

When you are ready to start investing, it is possible to begin with as little as $25. You can then add to this at suitable intervals that suit your pocket when you know how to invest in Canada. 

Those who start investing early for their retirement should place at least 10% of their income into their investment account. However, if you begin a bit later in life, then a minimum of 15%-25% of your salary is recommended.

If you cannot afford to start at these percentages, you should still try to invest as much as you can afford each month. When you understand how to invest in Canada, you will know that the important thing is to start as soon as possible.

Which type of investment account should I use?

When investing for your retirement, you have three different kinds of investment accounts to choose from. They are a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), and an Employer-sponsored retirement and pension plan.

When learning how to invest in Canada, it is good to know that RRSP and TFSA accounts are the standard. Which will be most advantageous for your investment will depend on how much you will be earning when you retire.

If investing through an RRSP, you will receive a tax refund on your contributions each year. However, when it comes time to withdraw the funds, you will be taxed on the amount drawn. 

The amount of tax incurred will depend on your tax bracket at the time of withdrawal. Therefore, if you believe that you will fall within a lower tax bracket when you retire, an RRSP may be a good option for you.

With a TFSA account, the opposite applies. You will be taxed with every contribution but will not be taxed when you withdraw. Therefore, if you think you might be in a higher tax bracket when you withdraw the funds, you should choose a TFSA account.

If your employer offers a retirement and pension plan, you should make use of it. These are easy options because your employer carries the responsibility of setting the account up with their broker. 

They will also deduct your contributions from your paycheque automatically. It saves you the hassle of setting up a debit order, which is good to know when learning how to invest in Canada.

The contributions you make to your employer-sponsored plan will not incur tax. However, you will pay tax on the amount you withdraw from the fund when needed.

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Which investment provider should I use?

Determining how to invest in Canada becomes easier when you know which investment provider to use. There are a few options to choose from, but your decision will be influenced by how much experience you have in investing.

Banks

Most Canadians tend to opt for speaking to the financial advisor at their local bank. However, these advisors are only permitted to sell mutual funds that are associated with that specific bank. 

The management fees you will incur through your bank’s advisor will be incredibly high, usually 2% or more of the value of your investment.

Automated investing services

Automated investing services (also known as Robo advisors) can be found online and offer index fund investment opportunities. These services provide a hassle-free, low-cost option for inexperienced investors.

With this type of provider, you can expect to pay 0.5% or less for the management and rebalancing of your investment as needed.

Financial Advisors

If you can afford it, going with a financial advisor is a great choice. Financial advisors could act independently or be part of a financial management firm. Either way, you would have a dedicated account manager to speak to and ask questions about your investment portfolio.

Several financial management firms will not take on clients with a portfolio worth less than $1M. However, many are happy to manage smaller investment accounts.

Most financial advisors will charge roughly 1% of the value of your investments per annum. 

DIY

There is always the option of opening and managing your own investment account through an online brokerage. While you will not have to pay any management fees to a provider, you will need to know what you are doing. This option is, therefore, only recommended for experienced investors.

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What type of investment should I choose?

There are many types of investment options, each with its advantages and disadvantages. When investigating how to invest in Canada, it is essential to understand your options. 

Annuities

This type of retirement investment will start paying you a regular income when you reach retirement age. These are usually low-cost investments and require a regular fixed contribution from the investor.

Canada Savings Bonds (CSB)

Available through the government, a CSB is a low-cost investment deducted directly from your paycheque. It will accrue interest until you cash it in, and you can cash it in whenever you want.

Exchange-traded funds (EFTs)

EFTs have become popular in Canada over the past decade. They provide a low-cost investment option with a low to medium level of risk. One can expect returns of between 6.2% and 7.8% per annum.

Mutual Funds

These are the most common form of long-term investment in Canada but come with a remarkably high fee. Mutual Funds offer investors options to diversify their investment easily and reap returns of up to 7.8% per year. This kind of investment is at a low to medium risk level.

Stocks

Investors can buy and sell stocks using an online brokerage at a low cost. While this kind of investment is not easy to diversify, investors can see up to a 10% return annually. The risk associated with stocks, however, is medium to high.

Bonds

Here, investors make interest payments (known as coupons) to lend money. The value of the coupon depends upon the risk associated with the issuer of the bond. While the risk of such an investment is low, the returns you yield each year will average about 2.7%.

Real Estate Investment Trusts (REITs)

Investing in a REIT involves placing money into a company that owns and manages a real estate portfolio. Real estate is usually a sound investment. However, the returns you gain will be dependent on the property market. You will also need to make a significant investment to see a profitable return.

Cryptocurrency

Cryptocurrencies such as Bitcoin and Ethereum may be all the rage. But the expected returns on an investment are purely speculative at this point. The risk of investment is, therefore, extremely high.

Guaranteed Investment Certificates (GICs)

With a GIC, you receive a guaranteed interest rate on your investment. Although this is a short fixed-term investment, one could use it to boost funds for your long-term investment account. The risk of investment is super low with a GIC, and your return will be 2% or less on average.

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Tips on how to invest in Canada for first-time investors

These are a few tips to bear in mind now that you understand more about how to invest in Canada. 

  1. Start investing as soon as possible.
  2. Begin with either an automated investment service or a financial advisor not associated with a bank.
  3. Aim for a simple portfolio at first and expand as you gain experience.
  4. Do not be discouraged if you lose money over the short term. Your investment will be meaningful in the long term.
  5. If your employer offers a retirement and pension plan, take it.
  6. Set up a debit order to ensure you contribute to your investment regularly.
  7. Focus on the amount you can save and place into your investment account each month rather than what your return might be. At first, your contributions will exceed your return. But as the value of your total investment grows, the return will be more impactful.

Final thoughts on how to invest in Canada

The highest investment fees in the world are those paid by Canadian investors. When you consider this, you understand why it is vital to learn how to invest in Canada.

Through this guide, you should better grasp what type of investment options are available to you. You should also have enough information to get you started with your first investment.

Knowing how to invest in Canada will go a long way to helping you make the right choices for your retirement and your future.

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FAQs about How To Invest In Canada

How much money should I invest?

It always depends on the investment provider you decide to go with. It’s better to open an investment account with an automated investing service first. You can then begin with a minimum of $25 and from there, you can add more as you learn more on how to invest in Canada.

What type of investment account should I use?

You can choose from the following:

  • Registered Retirement Savings Plan (RRSP)
  • Tax-Free Savings Account (TFSA),
  • Employer-sponsored retirement and pension plan.
Which investment provider should I use?

You can choose different providers depending on your investing experience. You can go with either banks, investing services, financial advisors or through online brokerage.

What type of investment should I choose?

There are a lot of investment options out there. To give you some examples:

  • Annuities
  • Canada Savings Bonds (CSB)
  • Exchange-traded funds (EFTs)
  • Mutual Funds
  • Stocks
  • Bonds
  • Real Estate Investment Trusts (REITs)
  • Cryptocurrency
How do I start with investing?

If you’re starting off, we suggest starting with an automated investment service. Always remember not to feel discouraged if you experience some losses along the way because that’s part of investing.

June 13, 2021
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