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Reader Mail: Beginner Trader

Bryan is a young, well paid, high tech worker from Ottawa. He is looking to start trading stocks but first needs some questions answered.

I have a question for you regarding online brokerage services. I’ve read your posts about Questrade and how you use them, and I think that I understand the concept. With a $4.95 a month plan, you can purchase 495 shares, after that you pay $0.01 per share?

My question is with dividends, where does the dividend money go to? Back to your questrade account? Or do you get a cheque in the mail?

I’m 27 years old, first time home owner (in about 3 months I close) and make a pretty decent salary in the high tech sector in Ottawa, and would like to start investing some of my extra money in dividend stocks such as BMO and Royal Bank. I was wondering if you could post a really n00b post on how to get started with maybe $1000 (without posting what to buy) but all the sort of beginner questions one would need to know.

The way that Questrade works is that they have a minimum charge of $4.95/trade (<=495 shares), $0.01/share after that for a maximum of $9.95/trade. If you trade 700 shares, you’ll be charged $7 for that trade. They call it democratic pricing.

With regards to dividends, they will be deposited as cash back to your account UNLESS you instruct the discount brokerage to reinvest them for you (DRIP). Most brokerages will offer DRIP for free, however, the condition is that the dividend paid out must be enough to purchase 1 share, or else it will just sit in your account as cash.

For example, CIBC’s dividend yield is currently around 5.35% (@$65), which means that you’ll need to own approximately $4,860 (current price/yield*4) worth in order to receive enough in dividends / quarter to purchase 1 share at today’s price.

That brings me to the last point, if you want to buy individual stocks, $1,000 isn’t enough. It might be enough for a small position in 1 stock, but then where is the diversification? If you want to start with a smaller balance, I would suggest that you invest in low MER index mutual funds which will also allow for small monthly contributions. When you build up your mutual fund account, you can then consider switching the money out into a self directed account.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 11 comments… add one }
  • Telly June 12, 2008, 9:38 am

    Assuming Bryan has started an RRSP (he should, since he’s making a pretty decent salary), I think FT’s advice is spot on that he buy low MER index funds (TD efunds are the favourites for many of us) to diversify.

    If, on the other hand, Bryan is already funneling a good amount to his RRSPs, then buying a dividend stock or two, unregistered, with $1k isn’t such a bad idea as, ideally, his registered portofolio should be well diversified and generally much larger than the unregistered.

    Dividend investing is a great thing, however, for mid-to-high salary earners, diversified investing including dividends AND growth, within an RRSP is really the way to go.

    If Bryan has left over cash after paying the mortgage and maxing out his RRSP then he should go ahead and buy his favourite dividend stock or two, otherwise, he’s probably best off to stick with index funds within an RRSP for now and worry about dividend investing when the cash flow improves or the RRSP fund is in pretty good shape.

    At least that’s my 2 cents. :)

  • Dividend Growth Investor June 12, 2008, 10:15 am

    I think that the first thing to do is save in a tax-efficient retirement account.
    In addition, unless your portfolio is more than $15,000, I wouldn’t go into individual stocks. I would go into individual stocks if I had the time to invest in researching them.
    Otherwise if you either have the money but have no time or you have the time but low amounts of money I would simply purchase several index funds and keep my contributions flowing each and every month.

  • Rod June 12, 2008, 11:25 am

    What about the Lazy Investor’s strategy of investing in safe stocks (Banks) DRIP plans with very little initial investment? ie $1000

    Also how do you get your money out of the brokerage account if you want to take some profit and go on a shopping spree?

    • FT FrugalTrader June 12, 2008, 11:43 am

      Rod, it’s pretty easy to withdraw money from a brokerage account. All that’s required is that you have cash available in the account, then do a an electronic transfer from the brokerage to your bank account.

  • Causalien June 12, 2008, 1:13 pm

    I suggest trying out Questrade with $100 first before you start pouring in real money. My personal experience with it has been bad, but individuals might have different preferences.

  • Rob G June 12, 2008, 4:48 pm

    Hi,

    I think Bryan should save up enough to buy a 100 lot of whatever stock he chooses. Save up to buy another 100 lot of another stock… This way he is building his portfolio into stocks he wants and also at the same time diversifying his portfolio every time he invests. My personal investment philosophy is to buy strong dividend stocks at a price I feel is acceptable. IE the bank stocks and GE… why won’t coke go on sale :(

    Anyways, there is a 100 different ways to invest your money, first thing he needs to do is to access his risk tolerance and come up with his own strategy. As I am about the same age as Bryan and I feel confident in my strategy I have no worries buying one stock at a time.

    Take care,
    Rob G

  • White Eagle June 12, 2008, 6:22 pm

    Bryan should check to see if his employer will match his RRSP contributions up to a certain level as several high-tech companies in Ottawa offer this benefit. If so, he should first ensure that he maximizes this source of free money before considering other options.

  • johnnycanuk June 14, 2008, 11:58 am

    Bryan should contribute the maximum to his RRSP, then use his tax refund to pay down his mortgage. This way he will build up equity in the home which can be borrowed against for investing in the future. Assuming a well diversified RRSP , he will have a good start to securing his future. He should note that a home (primary residence) is a major investment that can appreciate over time with no capital gains. Interest paid on investment loans can be deductible if there is reasonable expectations of dividends being paid. Interest will not be deductible if the stocks purchased are speculative, and you are looking for capital gains only.

  • paulette August 24, 2008, 12:06 pm

    Investing is like a gamble specially on stock market. ALways check the stock market report.

  • Kyle October 12, 2008, 2:09 am

    Quick Question outside of the stock market talk!
    Im new to investing and have been primarily doing so in Registered MF’s and taking advantage of the tax break – I’ve been using ING Direct and have been self picking MF’s – Using a website such as morningstar, How to I figure out the dividend distribution for any given MF.
    Thanks

  • Kyle October 12, 2008, 2:19 am

    Sorry, for example (It wont let me edit my last post)
    AGF Dividend Income

    Under its Morning star Report – Portfolio Tab –
    Which of the Investment Style Factors do I look at?
    Again, Thanks all for your very good input on everything

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