Guide to Trading in Canada (2024)

Day trading has increased rapidly over the last few years thanks in part to the spread of regulated low-cost online brokers, as well as the continuous improvements of online trading platforms.

But how do you start trading and what types of day trading are there?

This guide to trading article gives an overview of trading, explains how it differs from investing and provides information on trading that you need to know before getting started.

What is trading?

The term "trading" simply refers to buying and selling on financial markets. Most often this is stocks, but it can be any financial instrument.

Trading is the process of frequently buying and selling investment assets over short periods of time with the purpose of making a profit. Traders will buy and sell almost anything as long as they believe the traded asset will fluctuate in their favour. Here are some of the most commonly traded instruments are commodities, stocks and currency.

Financial trading often disregards the direction in which an instrument is moving. Whether the value of the instrument is increasing or decreasing, trading can take advantage of the movement. This is why trading often incorporates more volatile investment assets, although leverage or margin trading can also increase profits on stable investments.

While traditionally, trading was difficult and time-consuming to do, online trading platforms have made trading and investing quick and easy for almost anyone.

How is trading different from investing?

Trading differs from investing in terms of the method used when trying to make a profit from financial markets. Investors will most often have a long-term investment strategy, where they incorporate a buy-and-hold policy in order to slowly increase the value of their investment portfolio over multiple years. Traders, on the other hand, continuously buy and sell investment assets to make small, but frequent, profits over short timeframes.

The amount of time a trader holds an investment isn’t the only difference between trading and investing. The factors that influence traders and investors into making trades also vary drastically. Here are some ways they differ.

Investors analyze and evaluate an asset's potential opportunity for growth over the long term and then compare that potential growth to its current value. If the investment asset is undervalued in relation to its growth potential, investors will likely trade upon that asset. With stocks, this form of investing is often referred to as value investing.

Traders, however, don’t care as much about an asset's potential value and instead focus on how technical factors and current market fluctuations will influence the direction of an asset over the short term. If traders spot an opportunity where a technical indicator promises to move the asset a few percentage points one way or another, they will likely trade that asset in the hopes of making a profit.

What types of trading are there?

While most investors tend to use the same long-term strategy, there are several different types of trading strategies that traders can use to try and make a profit. The trading strategy chosen will often be based on specific financial goals, the asset they are trading, the period they want to be invested for and the tools used when analyzing market movements.

These types of trading strategies include

• Swing trading
• Intraday or day trading
• Scalp trading & high-frequency trading (HFT)
• Momentum trading
• Range trading
• Copy trading
• Social trading

Let's take a look at these in some more detail.

What is swing trading?

Swing trading is a form of short to medium-term trading strategy where an individual invests in a financial asset and holds their position for a couple of days. The trader tries to take advantage of a recent trend that swings the value of the financial asset one way or another in order to make a profit.

What is day trading?

Day trading, also known as intraday trading, is where an investor will buy and sell a financial asset on the same day. Usually, this means that the trader buys the asset at the beginning of the day when the specific financial market opens and sells the asset before the market closes.

Since profits can be low when day trading, day traders commonly invest using margin accounts, or leverage, offered by their brokers. By leveraging a trade, the investor borrows money from the broker to drastically increase their financial position on the trade. This leverage can, in turn, increase the trader's profits or seriously inflate losses.

What is high-frequency trading (HFT) and scalp trading?

Scalp trading is a form of HFT strategy where an investor will make numerous trades on a given day. While this aspect makes it similar to day trading, scalp trading is incredibly demanding and the frequency of the trades undertaken is exponentially larger.

Scalp trading positions are usually very small and the profits on each trade reflect the size of the trade. Therefore, scalpers have to open many trades in several different securities over a very short amount of time in order to make sizeable returns. As such, scalp trading requires a lot of research, analysis and energy when compared to other trading strategies.

What can be traded?

Nearly every investment asset available can be traded over the short term. Either directly with larger or smaller sums of money, through margin accounts or leverage trading or directly from other market participants using ECN brokers or against brokerages.

The type of security that you chose to trade will often be linked to your investment capital, trading strategy and the time you have available to trade. Tradeable investment assets include:

Let's explore these next.

Stocks

Stock trading is one of the most commonly-traded instruments for day trading. Stocks are easily understood and you can determine the stock's value using both technical analysis and fundamental analysis.

Stocks, also known as equities, are shares of publically-traded companies that can be bought and sold on the stock market. When you own stocks you effectively own a very small slice of a publicly-listed company and you may receive other rewards for ownership such as dividends.

Five types of stocks include

• Growth stocks
• Value stocks
• Dividend stocks
• Blue-chip stocks
• Penny stocks

Stock trading is available to anyone in Canada with a brokerage account. Consider comparing the best brokerages in Canada before opening an account.

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Bonds

Bonds are fixed-income investment assets that can either be issued by companies or governments and are only valid for a certain amount of time. The bonds are issued in order to raise money so when you buy a bond, you effectively loan money to the bond provider. Similar to when you loan money from the bank, the issuer will pay you interest on the money you gave them for the bond. When the bonds’ timeframe lapses, the investor will get their money back.

Funds

Mutual funds are created by investment companies that pool the money from multiple investors into one pot which is then invested into specific assets which can range from stocks to bonds or a mixture of both. The mutual fund is managed by a fund manager who invests the total in accordance with the mutual fund’s objective. A percentage of the overall investment is paid to the fund management company and is referred to as the Ongoing Management Charge (OMC) or Expense Ratio (ER).

Investing in a fund is relatively risk-free since your money is spread over a large number of securities, as opposed to being invested in just a few stocks. This is often referred to as diversification.

Exchange Traded Funds (ETFs)

ETFs are similar to mutual funds since money from numerous investors is pooled and invested over a wide range of securities. Unlike mutual funds, however, ETFs can be traded on a stock exchange similar to normal stocks. Furthermore, they will often be passively managed and solely track specific indexes, or investment sectors, meaning that they do not have an active fund manager. As a result, the ongoing cost of investing through an ETF is often quite a lot cheaper than through a managed fund.

Forex

Forex is short for the foreign exchange market and forex trading is the simultaneous buying and selling of a pair of currencies at the same time. Similar to exchanging the Canadian Dollar for United States Dollar before a holiday, forex traders will buy a specific currency with a large capital before exchanging the currency back when the exchange rate moves in their favour and they can make a profit.

Commodities

Commodities are an investment instrument based on physical goods that can be changed for currency or other goods of a similar type. These goods can range from agricultural products such as wheat, rice, coffee or lumber to energy products such as oil and gas. Precious and hard metals is another form of commodity frequently traded and include things like steel, copper, gold and silver.

Contract For Difference (CFDs)

Contract For Differences (CFDs) is a form of investing where the trader does not own the underlying asset for which the CFD is created. The CFD is simply a contract between the buyer and the CFD broker that stipulates that the two will exchange the difference in the value of the underlying investment between when the CFD was opened and when it was closed.

Futures

In finance, futures are a derivative which is a contract between two parties with a derived value based on the performance of an underlying asset. Futures, specifically, are a contract that binds a buyer and a seller to the purchase or sale of an asset at a future date for a set price. When the date comes due, the buyer has to buy the underlying asset at the agreed price, or the seller has to sell at the agreed price, regardless of the actual price of the asset at the time.

For example, a buyer may agree to buy 100 grams of gold a year from now at the price of $60 per gram. If the price of gold increases to $65 per gram the buyer will make a profit. However, if the price of gold falls to $50 per gram, the buyer will make a loss.

Options

Options are another form of financial derivative where the contract exists between two parties similar to futures. The options contract, however, gives the holder the opportunity (option) to buy or sell a specific asset at a specific price within a set timeframe. Unlike a futures contract, the owner of the option is not obliged to buy or sell.

The two types of options contracts are call options and put options. The call option gives the holder the right to buy the investment, whereas the put option gives the holder of the contract the right to sell the security.

Swaps

Swaps are also financial derivatives where the value lies in the cash flow of an asset (such as interest) as opposed to the value of the asset itself. The two parties exchange (swap) the cash flow values for a specific period of time.

For example, party ‘A’ with a variable rate of interest might consider exchanging their variable payments with party ‘B’ who will instead pay party ‘A’ a fixed rate and take over the variable interest payments.

Cryptocurrency

Crypto is a digital investment asset which has proliferated in the last 15 years and includes cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) and crypto tokens such as Tether and Chainlink.

Cryptocurrency is a volatile investment asset, often moving several percentage points in at any given moment. The volatility of crypto trading makes it a high-risk trading option when compared to other investment assets such as funds, bonds or even stocks.

How do you start trading?

Anyone can start trading fairly easily with the help of the best online brokerages, minimal deposits and online trading guides. Getting started with trading is, however, only the first step. It is much more difficult to become good at trading.

Before you start trading you have to review your finances and see how much money you have to trade with. Will you be adding more money each month to your trading account, or will you only trade with one lump sum? If you are adding money to your trading account regularly, you will also have to consider if that money would be better off invested.

When you know your trading budget, you can start looking into a trading strategy that is aligned with your trading capital. The more money you have the more options you will have to trade. However, some brokerages now allow individuals to open accounts with as little as $1. You can start trading with minimal investment.

Once you have researched and analyzed the various forms of trading, you will want to pick an online broker that aligns with that trading strategy. For example, if you are considering forex trading you will want to look more closely at forex brokers.

The last step is to open an account with the digital broker of your choosing. Opening an account with a broker is relatively easy but you will have to provide them with personal information and some documents to verify your proof of identity, proof of residence and sometimes proof of income.

What are trading platforms?

Trading platforms are software that has been created that gives investors direct online access to financial markets such as stock exchanges or foreign exchange markets. Through the trading platform, the trader can buy and sell nearly any form of investment asset in real time.

Trading platforms can differ in quality and features. Traders will typically look for brokerages who can provide access to the best trading platform software with the least amount of bugs, and that also provides access to a vast array of analytical tools such as real-time price fluctuations, interactive charts, and live news feeds. Many day traders also require information on order sizes, trading volumes or price levels to aid them with their specific trading strategy.

How do you pick a platform for trading?

The best way to pick a broker and trading platform is to find the brokerage that allows you to undertake your preferred trading strategy. While some brokers will be better for day trading, some will have preferable rates and analytical tools for scalping.

You should also consider several other criteria that can influence your choice of broker. These can include:

• Training guides, tutorials and support: if you are a beginner you should find a broker and platform that has a simple user experience and an extensive range of articles and guides that can get you started.
• Analytical tools: some trading platforms provide in-depth analytical tools to help traders research investment opportunities.
• Commissions, broker fees and spreads: you should consider how much you will be paying in broker fees for the opportunity to use their trading platform. Some charge commissions while others have annual fees.
• Security and reliability: Verify that your brokerage is regulated by a legal authority like the Investment Industry Regulatory Organization of Canada, or another recognized legal authority if using a platform that is based abroad. Traders should never open an account with a broker that isn’t regulated.

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How do you place trades?

In order to invest you will have to first place a trade. Traders place trades by submitting buy or sell orders through the online broker that they are using. Buy orders instruct your broker to buy certain investment assets, whereas sell orders sell specific assets that you have. The three most common ways to place a trade are:

• Market order
• Limit order
• Stop order

How is trading taxed in Canada?

For the majority of Canadians, trading is taxed as capital gains at the current inclusion rate. In Canada, the inclusion rate is currently 50% so any profits made from buying and selling assets will be taxed at this rate.

However, for day traders who make the majority of their income through trading, or rely on it as their main source of income, capital gains tax may not apply.

Is day trading legal in Canada?

Yes, day trading is legal in Canada and any profits made from day trading are a legitimate source of income. If traders earn enough day trading, they can even declare it as their main source of income according to the Canada Revenue Agency.

Ready to start trading? Find a brokerage that is right for you.

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