My updated investing article. I wrote this with an emphasis on risk & safety rather than beating the market and gaining absurd returns. We’ll start with the basics. By this point, you should realize that a stock is a type of share of a publicly traded company and a share at its most basic definition is some form of right to the company’s equity portion on their financial position. You could say a share is part ownership, but some stocks don’t have voter rights, and even if some do, there’s sometimes a controlling shareholder. Thus, from the perspective of most individuals, shares are simply rights to the equity of a company.

What is a Brokerage?

To start investing, you will need to open an account it through a platform called a brokerage. A brokerage allows you to trade shares of companies, baskets of stocks (aka ETFs and exchange traded funds), and derivatives of stocks (aka options).

Where to Open an Account (CA)

I recommend opening up a National Bank account or an InteractiveBrokers (IBKR) account. I recommend National Bank because there is no commissions and no annual fees (U30, > C$20,000 in account value). I recommend IBKR, as they offer very fair commissions and very affordable and quick currency exchange compared to all other platforms that require employing a different technique to reduce the FX fee. The other benefit of IBKR, is that you can invest easily in international markets. For example, you can own the real BMW not the American Depository Receipts BMW.

When you open an account, you will be asked what type of account(s) you wish to open/apply for.

Types of Accounts

Before you open an account, it’s best to learn about the different types of accounts that are available in your country of residence. Accounts that are defined by the government are called registered accounts and normal brokerage accounts are called unregistered accounts and are ubiquitous across countries. For example, Canadians have access to these registered accounts. The maximum amount you can contribute to these accounts is listed under your account information with the Canadian Revenue Agency (CRA).

Registered Accounts

• Tax Free Savings Account (TFSA)
  • The contribution room for this account will increase by thousands of dollars every year you are a resident of Canada regardless of income
  • The contribution room is cumulative
  • The contribution room will increase a year after withdrawals (not quite a year actually, but not within the same tax year)
• Registered Retirement Savings Plan
  • Tax deductible contributions
  • Withdrawals are taxed and do not increase the contribution room
  • Contribution room is cumulative
  • Contribution room increases based on salary
  • Home Buyers’ Plan lets you withdraw up to a certain amount with the condition that you repay it. I suggest reading the link above for when you do plan on making a withdrawal as the rules are ever-changing
• First Home Savings Account
  • Tax-deductible contributions
  • Lifetime contribution limit of $40,000
  • Yearly contribution of $8,000 which accumulates for only a single year
    • Suppose you don’t contribute to the FHSA for 3 years. year 1: $8,000 contribution room, year 2: $16,000 contribution room, year 3: $16,000 contribution room, year 4: $8,000 (deposited $8,000), year 5: $0 (deposited $16,000)
    • FHSA eligibility and more information
• Registered Education Savings Plan (RESP)
  • One plan per child
  • Information about the RESP as well as grant eligibility
  • There is a way to optimize this plan, but I forget

Optimal Registered Account Contributions

1. Max out FHSA
2. While FHSA is still available, contribute max of $12,000 per year to RRSP
   • When you already own a house, contribute the amount you think you won’t need until you plan to retire
   • Due to marginal tax rates, your withdrawals could be taxed lower than your current income
3. Max out TFSA

Non-Registered Accounts

1. Cash
2. Margin: ability to buy shares with borrowed funds or borrow shares to sell
   • If you use margin to borrow, then it can get very dangerous because you will be trading with leverage
   • Example of leverage: Suppose I borrow $99,000 and I only have $1,000 and I buy a stock which goes down by 1%. I lose $1,000 of my own money.
   • This type of account is useful to apply some non-leveraged options strategies which I mention at the bottom of the article
   • Due to the risk of options trading, you may be restricted from using them
   • I recommend investing at least two years before trying to use options

How to Invest

Investing is something everyone can do. Trading is a different ball game and requires sophisticated strategies and perspectives on the market. Both are used to grow capital, however investing is inherently less risky than trading. Investing capital growth relies on the weighted average performance of the shares you own, whereas trading may rely on a few concentrated shares. We’ll first go over two ways to invest, and one way to trade. For each strategy, I recommend investing 11% Canadian and 89% U.S. just for optimal diversification (population ratios). The easiest way for a company to increase its profits is via population growth, which is why I recommend this ratio.

Converting CAD to USD and Back: Norbert’s Gambit

With IBKR, I suggest just using the platform as the fees are very affordable. With other brokerages however, I suggest employing Norbert’s Gambit to avoid percentage foreign exchange fees. This is incredibly simple for RBC. Buy DLR and sell (short) DLR.U. RBC will settle both balances automatically. On a brokerage like National Bank I don’t believe the platform will auto-settle a long and a short of the same stock. You will need to contact support and ask them to journal shares to the stock traded on the US exchange or USD denomination. I usually value invest, so I buy a bank stock traded on the TSX and NYSE and then ask the brokerage support to journal the shares that I don’t plan on holding. So I might buy 300 shares of TSX:BNS, and then journal 270 of them to NYSE and then sell them. Most of the time I’ve done this the stock has appreciated while holding it for a few days, and technically speaking if stocks are priced to return capital, stocks should be going up most of the time anyways.

Passive ETF Investing

The first way to invest, is passive. Passive investment can be done by purchasing ETFs, which are baskets of shares in companies that particular ETF says they hold in. For passive investment, funds that encapsulate 100+ stocks based on market-cap or location are recommended. The S&P 500 index is the defacto market index whenever people mention or talk about the stock market in the context of North America. It is so influential that the concept of risk-adjusted returns (Beta) of individual stocks and ETFs is compared to the market (S&P 500) return.

For the Canadian portion of your portfolio, the market is small enough to simply purchase TSX:XIC and be done with it. If you are not that optimistic about the Canadian economy, then hold TSX:XEQT; the makeup of XEQT is a third in Canadian equities, a third in US equities, and a third in the international equities.

Below is what I would be purchasing with new deposits depending on the market situation. I would only re-balance the QQC.F position since it’s CAD hedged and it’s pretty easy to gauge when the USD is overvalued relative to CAD, but to be honest it may not be worth the commissions.

Market Situation	ETF to Buy if CA Based	ETF to Buy if US Based	Rationale	Example Situation
Market just crashed	TSX:QQC.F	NASDAQGM:QQQM	When the market crashed, growth/tech stocks usually crash harder and CAD also depreciates relative to USD. High concentration is best for both residents, and for CA combine with CAD hedged since the FX is more expensive than normal	2020 Lock Down Crash
Bear market (market is slowly declining)	TSX:QQC	NASDAQGM:QQQM	When the market has significantly fallen already	2022 bear market
Bull market but not past at all time highs	TSX:QQC	NASDAQGM:QQQM	Market is recovering, blue-chip growth stocks can beat the market	February 2023 - May 2023
Bull market at all time highs but 5yr CAGR is less than 15%	TSX:QQC or TSX:VUN	NASDAQGM:QQQM or ARCA:VTI	It could be argued that the market is overheated but a single person can’t dictate the market	April 2023 - July 2024
Bull market at all time highs but 5yr CAGR is greater than or equal to 15%	TSX:VUN or TSX:EQL	ARCA:VTI or RSP	Overheated market	May 2024 - ?

ETF Information

• XIC
• XEQT
• QQC.F
• QQQM
• VUN
• VTI
• TSX:EQL
• RSP

Since most of these index ETFs are market-cap weighted, a lot of them can easily be concentrated among big tech which are companies that typically outperform during bull runs and outperform during bear runs. Typically a bull-ruin lasts longer than a bear, so the advice is to invest in these concentrated “market” ETFs during a bear run and keep investing in them until the bull run has surpassed the previous highs by an annualized 10% return. At that point, it may be more prudent to switch to investing in equal-weighed ETFs.

Passive Value Investing

Value investing is where you have the capability to value a stock. Valuing a stock is incredibly difficult, as it has been proven that most hedge funds and mutual funds cannot outperform the returns given by investing in the market. Still, with value investing, you need to rely on diversification. From studies, the risk of your portfolio can be reduced to systemic but the marginal improvement diminishes at around the 20 stock market. What does that mean? Invest in chunks of 1/20. So if you can only find 6 stocks that are under-valued, you invest 14/20 of your cash in a market ETF, and only 1/20 in each of the stocks you picked. This way, your portfolio’s performance isn’t impacted drastically by the business risk of a few handful of stocks. An example of a business risk is one of your stocks sells commodities but those commodities have tanked. Another example is META in 2022. It actually doesn’t matter if the business is doing well, the market can perceive the company to be doing poorly. By diversifying, your portfolio will continue to perform at the market, and can outperform the market after you re-balance it. A re-balance would be selling some shares in stocks that you don’t really expect to outperform anymore, and topping up losers as if you just invested 1/20 of your portfolio. Sometimes, you may want to double your position. Doubling your position is very risky because you don’t to risk timing the stock’s bottom. I highly suggest doing it whenever the stock drops 10%+. When a stock that you deem is under-valued (and isn’t a fairly valued growth stock) drops by this much, you can view it as a discount. Capital markets theory even dictates that prices adjust down to improve the expected return. So if a stock goes down by 5%, the stock’s value goes down … because it’s expected to return a set percentage. It’s hard to explain this, but think about wanting a 10% return and the company is doing well. You find out today some information that makes you think the stock is worth less. You still want 10%, but you know the value of the company must be lower to achieve that return.

Active Investing

Active investing is outlining a strategy, such as growth/momentum and having a very short-term horizon where you could be buying and selling a stock the next week. Day trading is not active investing, as day trading is never about trading based on opportunity, and the losses of day traders make that clear. Never day trade, never look at stock that are momentum, because there’s a high chance you did not purchase the stock at the day’s lowest. It’s impossible to predict the future, yet day trading only works if you can do that.

Types of Orders

• Limit order: a bid to buy a stock at a max price OR an ask to sell your stock at min price
  • A limit order can either be non-marketable or marketable. When you place a limit order that is marketable, that means you will acquire/sell your shares but have set a price that you don’t want to exceed.
• Market order: buying whatever the sellers are offering and vice versa. Use with discretion for Canadian securities. For US securities, may even be more beneficial than a marketable limit order due to payment for order flow.

Option Contracts

Purchasing option contracts (option henceforth) can easily become gambling since it’s hard to gauge how much money to use to purchase an option. At the basics, an options contract provide the holder an option to do something with the underlying share it is linked to. For example, options that gives the holder the right (not obligation) to buy shares at a specific price (the strike price), is call a Call and an option that gives the holder the right to sell shares at a specific price is called a Put. Options have expiry dates, so holding onto an option with an unfavourable strike price would mean that if the underlying stock does not move to a favourable price, your option may expire worthless! Similar to a margin account, options are a leveraged strategy. However, Your loss is limited to your cash purchase. It’s very useful for short-term speculations, where you are 99% sure of some sort of event, but of course, speculation backed by hunch is gambling.

Options can also be used in lieu of owning shares for a slight bump in leverage. The hardest part of purchasing options will be valuing them. There are all sorts of models, both academic (Black-Scholes-Merton) and proprietary. Options can be at the money (strike price very close to or equal to the market price of the stock), in the money (favourable to execute the option. The strike price is less than the market price for calls and the strike price is higher than the market price for puts), or out of the money (the price is purely based on the models or speculation, and are not executable as the strike price is not in the money). Lastly, options are usually priced at a per share basis but represent 100 shares at a time. So if I a call option for IBM is trading at $1/share and I purchase one options contract, I pay 100x. This is somewhat where the leverage comes from.

Suppose you want to allocate some money to a stock you can’t even afford 1 share of

• What not to do: purchase a call option with a strike price close to the market price of the stock with an expiration date nearby. This is speculative
• What you could try to do: Purchase a call option that is (a) dated far out (b) is as deep in the money as you can afford
  • Every couple of months, you may want to roll the contract. A roll is when you sell your contract and buy a further dated contract in one order and pay/receive the difference in market price
  • I don’t recommend employing this strategy if you can afford many shares of the company, because shares can move double digit percentages without you being able to foretell. Even if you roll the contracts, option contracts are usually not free to trade on Canadian brokerages

Suppose you hold a call option with a strike price of $10. The option is in the money and you want to take your profit. You can either sell the option at the market price which is most preferable or you can exercise the option. Exercising the option doesn’t mean you get shares for free, it means that you will pay $10/share for 100 shares (1 contract). This is important to understand if you want to take part as the options writer.

Suppose (in a margin account) you own shares in a company that you don’t think will move significantly within your time frame.

• Write (sell) a Covered-Call: If you own multiples of 100 shares, you can sell out the money call options such that if the share price is above the strike price, you will only miss out on the gains, but will not be losing money, unlike a Naked Call, where you are on the hook for the price difference. You get paid for giving away your right to have your shares taken away from you.

Suppose you want to own shares in a company that you don’t think will move up significantly.

• Write (sell) a Cash-Covered Put: If you are have $6,000 and are willing to hold that much of a company, then you can write a put option at strike prices less or equal than 6000 / 100^n and you get a deposit for selling someone the right to sell their shares to you. You must ensure that you are writing only as many put options as you can cover using cash. For example, 1 put option at a strike price of $60 takes up $6000 of your entire buying power, even if you do have more than $6000/

Futures

Futures are similar to options but most sides have an obligation to deliver or take delivery of the underlying assets. The underlying asset could be equities or even goods. Sometimes the delivery is cash-settled due to how these contracts are used by investors. If a contract is cash-settled, it’s usually used for hedging rather than for budgeting purposes. Equity futures are most important for traders predicting the direction of the market (see E-Mini futures) or for institutions who want to hedge their portfolio and change its risk without having to buy many different options. For more information, I recommend reading my notes for Options, Futures, Swaps.

Crypto-Currency

Sike! There’s no such thing as “investing” in crypto-currency. You are either gambling or want to be a part of the P2P cash adoption.