Introduction to Investing in Individual Stocks and ETFs

Introduction to Investing in Individual Stocks and ETFs

Most people get started in investing by buying mutual funds at their bank branch or from a financial advisor. Usually this is in an RRSP account or Tax Free Savings account (Canada) or a 401k account (United States). Some of these people eventually want to invest in individual stocks and/or Exchange Traded Funds (ETFs).

How does one get started investing in individual stocks and/or ETFs?

The short answer to this is, talk to your bank and they can (usually) tell you what you need to do.

Investing in individual stocks and/or ETFs requires an investor to open up a stock trading account. Don’t be intimidated, it’s not much harder than opening up a checking account. All of the big banks offer investment trading accounts for do-it-yourself investors. After the account is opened you can trade the stocks very easily either through an internet page or by telephone.

Many investors enjoy picking their own stocks. They rely on a variety of sources including investment books, newspapers, investment oriented television programs, stock newsletters, web sites, their own fundamental research and other methods. These investors usually trade through self-directed accounts at one of the major banks. Any bank branch can assist you in opening such an account. Since the bank staff is more used to mutual fund investors you may have to insist that it is a self-directed discount brokerage account that that you want to open. Once the account is opened investors are given passwords to trade stocks through an internet site, or they can phone in their trades. These accounts are referred to as discount broker accounts. The trading commission is low but the discount broker does not provide any trading advice, it is strictly do-it-yourself. However, they do provide some generic stock research on their web sites.

Once your self-directed discount broker account is opened you can, if you wish, transfer into it any mutual funds or other investments that you already own. Your bank and/or the telephone customer service staff at the discount brokerage can arrange this for you.

Other investors prefer to rely on the advice of a broker when picking stocks. For this service an investor needs to open a full-service brokerage account. Most of the major banks offer this service as well. There are also some independent brokerages. Brokers are licences to help you trade stocks but they typically need to get your permission each and every time they buy or sell a stock for you.

Still other investors prefer to have a a portfolio manager take care of their investments on a discretionary basis. In this case the portfolio manager is free to buy and sell stocks for you without needing your permission for each individual trade.

How is investing in stocks different than investing in stock mutual funds?

A stock mutual fund is a group of stocks. Mutual funds provide a way of making a diversified investment in the market or in a certain industry segment of the market without having to pick individual stocks. A major advantage of mutual funds is that they allow investors to put small amounts of money into the market such as $100 per month.

Mutual fund advisors will typically place a client’s money into a mixture of mutual funds after assessing the client’s risk tolerance and goals.

A possible disadvantage of mutual funds is that they charge management fees which reduce the return. Many investors believe that they could do better by going into individual stocks and avoiding the mutual fund management fee.

How much money is needed to get started investing in individual stocks?

The commission to buy an individual stock or ETF is about $10 or less The same fee usually applies for purchases for any quantity or dollar value of shares.

Each bank will have its own fees and policies. An annual fee of $100 for some accounts can apply but it is waived if the account holds more than $25,000 ($15,000 at some banks).

Given a $10 commission, an investor would generally want to be buying at least $1000 worth of shares to keep the commission at or below 1%. Given that an investor would generally want to hold more than one stock, and given the annual fees that often apply to smaller accounts a realistic minimum level to get started is in the order of $15,000. Below $15,000 it probably makes more sense to stay with mutual funds.

In the end there is no set minimum to how much money you need in order to get started trading on your own. You could start out with just a few thousand dollars especially if you are planning to save additional money and grow your account. The decision to open a self-directed account is driven mostly by a person’s willingness to trade on-line and to be a do-it-yourself investor rather than any set dollar threshold.

Can retirement and education savings plans and Tax Free Savings Plans be invested in individual stocks?

Absolutely, yes in the case of self-directed plans. Many investors hold mutual funds and guaranteed investment certificates in their retirement and education savings plans and their Tax Free Savings Accounts. Your bank / discount broker can often move these assets into a self-directed trading account if you wish. After that you can contribute cash to the self directed account and then invest the cash in stocks. You can also sell mutual funds (but ask first about penalties for selling) or cash in the investment certificates as they mature.

However some retirement and education plans are administered by the employer or a savings institution and may not be eligible for individual stocks.

Many independent investment advisors are licensed only for mutual funds and not for stocks and may be reluctant to admit that you can change or move your account and have it self-directed. In these cases it is better to discuss the matter with your bank and they can transfer you accounts away from the investment advisor if that is what you want.

Are Individual Stocks Too Risky to Invest In?

This depends on each investors individual circumstances, knowledge level and ability, with the help of advisors, to pick appropriate stocks. An exploration of other articles on this site may provide some insight. All investors should work to improve their knowledge levels, in order to make better decisions regarding risks and potential rewards in the markets.

What about Exchange Traded Funds (ETFs)

Exchange Traded Funds are like mutual funds except that they are bought and sold like stocks. They are usually managed in a “mechanical” fashion by simply tracking an “index’ such as the Dow Jones Industrial Average. They tend to have very low management fees.

What Particular Stocks or Exchange Traded Funds Should You Invest In?

That is an excellent question! There are thousands of stocks to choose from just in The U.S. and Canada and thousands more around the world.

Traditionally stock investors used to rely on a full service broker who would provide advice as to which stocks to buy and then would arrange to buy those stocks for you, if you agreed. Full service broker services are offered by the major Banks and by some independent brokerages. Many full service brokers will not open an account with less than $100,000 invested and many require $500,000.

Most investors today use discount brokers. All of the major banks offer discount brokers where you can trade by telephone or internet. The trading fees are dramatically less than for full-service brokers but no individual advice of any kind is provided. The on-line brokers do however typically provide buy / sell ratings on a large number of stocks. These do-it-yourself investors also often select stocks based on recommendations they see on investment television.

Many do-it-yourself investors also subscribe to one or more Stock Newsletters or paid Stock Advice internet sites.

Our Stock Ratings service provides a list of stocks that we consider to be good investments. However, we make no guarantees whatsoever.

Why Subscribe to a Stock Newsletter or paid Stock Advice Web Site?

There are some good Stock Newsletters in existence that have long track records of providing good advice. (There also some bad ones out there). Increasingly many of these services are available on-line. A legitimate Stock Newsletter or Stock Advice Site offers a way for many subscribers to share the cost of expert advice. The advice provided is not tailored to any particular individual but rather is “generic” advice. A legitimate Stock Newsletter or internet Stock advice Site is usually totally independent of the stocks being recommended. (In contrast, much of the research that is provided free of charge has been paid for by the companies being recommended or other conflicts of interest exist.)

Do-it-yourself investors can easily save up to 2% in hidden management fees compared to the costs of using mutual funds. A Stock Newsletter or Stock Advice Web Site can be very economical. One or two good services can easily be purchased for something in the range of $150 to $400 per year. This may allow do-it-yourself investors to feel comfortable buying stocks which then can avoid thousands annually in mutual fund fees. You may wish to consider our Stock Ratings service.

Why Not Just use Free Research Sources?

Free research has often been paid for in some way by the companies being recommended or there is some conflict of interest involved. Also free research may be voluminous and scattered all over. In contrast a Stock Newsletter or Stock Advice Web Site is usually presented in a concise easy to follow fashion, so that the investor can follow the advice quickly and easily.

However, discount brokerages also provide plenty of free advice on their web sites. It is certainly not necessary to subscribe to any stock newsletter services. Some people will find these to be of value and others will not.

How should investments be divided between cash, fixed income and equities?

See out article on Where and How to Invest.


Shawn Allen, CFA, CMA, MBA, P.Eng.
InvestorsFriend Inc.
Last modified September 26, 2017