Start Investing

A few people in the last few weeks have asked me about the 'basic basics', as in the very first steps. So I started this blog.

First of all:

• Don't buy mutual funds.
• Don't talk to financial advisers. Most are mutual fund salesmen or insurance salesman. Sometime down the road you may want to find a fee based financial adviser, but you'll be better off if you have a base level of investment knowledge already.
• Don't listen to anyone who talks about hot stocks.

Ok.

The first step is to open an account at a discount brokerage. A "discount brokerage" means little or advice, so you won't be getting calls from your stock broker like movie stars and CEO's do. You also have to buy and sell yourself, but it is very easy.

Most banks offer discount brokerages, I used Scotia Mcleod for awhile. RBC's is called Direct Investing. They are all good options, but look at the fees. Fees are your enemy. What you want is zero account fees, and $20 or less trade fees.

Right now Sandy and I are using two accounts, one with QTrade, and one with Scotia Itrade (formerly e-trade). The independent places like these two usually have slightly lower fees than the banks (like 7 dollars less per order).

Check out the discount brokerage, fill in the form, I think you have to mail it in. You should open a cash account to start, if you want, open an RRSP account. Often the RRSP account requires a 15K minimum balance to avoid fees. One reason we went with itrade is that it has no minimum balance for RRSPs.

When you have the account you can transfer money from your normal bank account, like a bill payment.

Generally your investments should be around 2.5 to 3k per purchase. The reason is that you want to keep the fees to a low percent of your investment. For example, $20 buy and $20 sell fees add up to $40, or 4% of a 1k investment. BUT if you invest 4K for each stock, then you only have to make 1% to cover the fees. Remember every percentage point counts. This is exactly why mutual funds, that take out 2.7% or more per year (but they do it every day so you don't notice), are not worth it.

Once you have your account, choose your first two or three stocks. A good idea to get started is an ETF. They are collections of stocks, like mutual funds, but without the 250K annual salary "manager". You buy them through the trading screen like any other stock.

ETFs just follow the underlying index. Instead of a 2.25% MER (warning PDF link) they have something like 0.25%, or less. Plus, they are up front about the MER and it is easy to find.

I have some XIU - ishares large cap. Basically the 60 largest companies in Canada. The MER is 0.17%. That I can live with. It pays dividends too. Another good ETF is XIC - it is the TSX. Hey, you only have to look at the front page of the paper to see how your investments are doing. Over the long term, you know the TSX will go up.

With ETF's you're done. Since you invested in the 60 largest companies in Canada, you don't need to worry about one or two of them going down. Overall the market will rise. Here is the secret: it is impossible for you to pick the one stock that will go up huge next year. However if you have an ETF, you will get in on that stock, because it is part of the collection.

I bought some XEG for $14.something per share. It is the energy sector. I think oil and gas companies will be successful in Canada but I don't want to research them individually. So, take the amount you want to spend, $2500, and calculate the number to buy, 180. Usually I round to a near number, for example for about $3020 you can get 200 XEG.

Go to your account, sign in and make the purchase. When you choose "order type" choose market. It will ask you to confirm and tell you the cost and the fees. For these big stocks, the ask price and bid price are very close, so you don't need to worry about the other options like stop limit.