There are really 3 types of trading/investing
- Day Trading. This is when you buy and sell stocks within minutes or hours. This is the most speculative and closest to gambling of the trading types. It requires hours of research and time spent focusing on charts during trading hours or however long your trading session lasts for. In Canada there are very few regulations on day trading. The government may make you register as a business if they deem you are trading actively enough to be a company. This site breaks down some of the rules really well. (https://www.daytrading.com/rules/canada)
- Swing Trading. This type of trading is when you buy and sell a stock within a few days. I did a lot of day trading early in my trading career. Buying a stock, selling when it went up and then buying back in once it went down a bit again. Rinse and repeat. I found it was a good way to make small amounts of money but has a tendency to miss big runs in a stocks price and you end up stuck with a bunch of holdings that went down instead of up after a while. This type of trading is typically only good for small gains and you have to cut and take losses fairly often when a stock doesn’t move the way you want.
- Investing. With this type of investing you buy and hold stocks for weeks, months and/or years before selling. This is the furthest type of trading from gambling as good investors generally do a lot of research beforehand and are fine with holding through some ups and downs in stock price. In Canada only 50% of your capital gains are taxable so if your are not using a tax sheltered account you only have to pay tax on 50% of your earnings and capital gains taxes are lower than normal income tax.
Types of Trading Accounts
- Margin/Option Account. This is your basic trading account where you pay taxes on any capital gains. This account also allows you to buy options and trade on margin. Options are a type of trade that typically allows you to bet on whether the price of a stock will go up or down without having to use as much capital as buying shares outright. It’s not really for beginners so I won’t get into it much here. Trading on margin allows you to borrow funds, usually a certain percentage of the cash in you account, over what is in your account to buy stocks with. There are fees and interest costs associated so this is generally a bad idea unless you really know what you are doing.
- TFSA. This is a tax-sheltered account. Any capital gains are not taxable and neither are dividends (U.S. and foreign stock dividends will still be taxed but not as much as in a margin account. U.S. stocks will be paid out minus 15%, which you do not get back.)
- RRSP. This is also a tax-sheltered account. Any money you put in you will reduce your income by that amount same as a normal RRSP. Capital gains and dividends are not taxable in this account including U.S. and foreign stocks. You will receive 100% of your dividend payments.
- RRIF. This is basically the same as an RRSP except you cannot take it out before retirement even if you want to, whereas you will just be taxed more if you pull out of your RRSP.
Types of Orders
Market Order– This type of order will just buy or sell your shares at the market price at the moment you put in the buy or sell. This is the bid and ask price you see on the screen.
Limit Order– With this type of order you select a specific price to buy or sell the shares at and it will only fill if the share price reaches your set price. These orders can be set to last indefinitely, end when the trading day does or only fill partial orders if the full amount you requested can’t be filled. In order to fill the order typically has to move 1cent below your requested price in order to fill.
Stop order/Stop Loss– With this type of order you will either buy or sell a stock at your set price. Once your set price is reached it converts to a market order and fills immediately. Traders typically use this to limit losses on trades.
Buy Stop Order- This is typically used only on short trades. It works like a stop loss but at a set price higher than the current market price to limit losses when shorting stocks.
There are a few more types of orders but they are typically only used by bigger money investors, such as an iceberg order (where you can only see part of their order if you have a more advanced platform where you can see what orders people have put in) and anonymous orders (where people can see the order but not who put it in, you only need this when ordered millions or more worth of shares).
Trading Platforms
Wealthsimple is hands down the best platform for beginner investors in Canada. There are no fees on any trades that you make (except for currency exchange fees). Every other trading platform in Canada charges trading fees.
Every major bank has their own platform. Scotiabank, TD, RBC, etc. There are also independent brokers such as Virtual Brokers (who I use), Questrade, Interactive Brokers, etc. A little bit of research into the different platforms and their fees goes a long way when picking a platform. Your trading fees and currency exchange fees will vary slightly from broker to broker as well as their tax forms, RRSP and TFSA reporting, customer service, etc.
Compounding
This is where long-term investors make their money. The 2 biggest key to making money with compounding is to not lose money, (compounding works both ways), and to get as much skin in the game as you can. 10% on $10,000 is $1000 growth per year but 10% on $100,000 is $10,000. $100,000 is largely considered the first big milestone for compounding growth as the vast majority of the first $100,000 will have to come out of your own pocket whereas the amount you have to put in afterwards to get to each $100k milestone afterwards is significantly less and decreases more and more as your money grows. That being said you don’t need to put in a lot of money to be successful at trading you just need to figure out what amount is best for you financially (to reach your personal goals) to put into trading and have a gameplay going in that you stick to (and review and adjust when necessary).
RRSP compounding is the last thing I want to talk about. If you put $10,000 into your RRSP you will get roughly $3000 back when you do your taxes. If you take this $3000 and put it directly into your RRSP you will get roughly $900 back on money you wouldn’t have had to pay tax on anyways. Assuming you put in $10,000 on top of this $3000 you will get an even bigger tax return which if reinvested will allow you to get money back on your money back on your money back and so on, allowing you to ‘compound’ your RRSP growth regardless of what you do with that money.
Pre-Market/Post-Market trading
In US markets(NYSE and NASDAQ) you are able to trade 30 minutes before and 30 minutes after the market opens and closes. In Canadian markets(TSX, TSX-V, CSE and NEO) there is no pre-market and post-market trading. Most pre and post market trading is done by financial institutions which is why you will see big fluctuations the next morning on certain stocks.
Outsider Trading 