Understanding how to invest in the Canadian stock market will help you diversify your portfolio, making the best selections possible.

Before you begin investing in the Canadian stock market, you’ll have an important choice to make: Do you use a discount broker and take advantage of the lower commission rates? Or do you deal through a traditional, full-service broker and pay extra for service and possibly some good stock research?

Knowing how to invest in Canadian stock market holdings is important. Many investors have given up on full-service stock brokers and do all their dealings through discount brokers, with no regrets. But a lot depends on you, and on the quality of brokers you have managed to find.

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Here’s what you need to know:

• Find a good stock broker, ideally through a bank.
• Set your sights on fewer trades and high-quality companies
• Make it a priority to understand dual-class shares
• Use our Successful Investor approach

We’ll walk through each step below.

1. A good stock broker is worth paying for, but hard to find

A good broker is generally worth the higher commissions that he or she costs you, compared to dealing through a discounter. However, good brokers are hard to find. Many good brokers eventually move into money management. Many bad brokers manage to pass themselves off as good ones, at least initially.

Today, it’s easier than ever to use a discount broker. The Internet provides lots of information on publicly traded companies, including corporate press releases, newspaper articles and company websites. Of course, you’ll want to take advantage of the information we provide on TSI Network. You may also decide to subscribe to one or more of our newsletters and investment services.

2. Look to your bank to find a good discount broker

Your bank is probably the best place to look for a discount broker. All of the “Big Five” Canadian banks have both full-service and discount brokerage arms. It’s also easier to transfer money between your bank account and your brokerage account if you have both at the same bank.

Commission rates are even cheaper if you use a discount broker’s Internet trading facility. Unfortunately, low commission rates sometimes lead investors to trade more than they should. They may assume they can’t lose because they can sell at the first sign of trouble. Being quick to sell can cut your losses, but that’s not the same as making money. And, if you stumble onto an investment that has a huge move ahead of it, you may wind up selling just before the move begins.

3. Fewer trades and high-quality companies are the keys to successful Canadian stock market investing

In the long run, the best way to cut commissions is by sticking to high-quality investments and making fewer transactions. This cuts commissions, and it improves your tax deferral.

For instance, suppose you buy an investment at $10 and it goes to $20. As long as you hold on, you defer taxes — the entire $20 keeps on producing dividends and capital gains for you. If you sell, you’ll have only $18 or so to reinvest, after capital-gains taxes and commissions. The lost 10% of your capital can take an enormous bite out of your returns, if you let it compound for a decade or two.

Download this free report now and discover how to find the best high-quality investments.

4. Make it a priority to understand dual-class shares when you are learning how to invest in Canadian stock market holdings

In the situation of dual-class shares, if a company’s two classes trade for roughly the same price, you’re better off buying the voting shares. That’s because the voting shares may move substantially higher than the non-voting shares if a shareholder who is trying to take control of the company accumulates a large number of shares. In addition, for companies with dual class shares, their voting shares sometimes trade above their non-voting shares because certain institutions refuse to buy non-voters, or only buy them in limited quantities.

Canadian stocks sometimes combine their voting and non-voting dual-class shares into a single share class to make themselves more attractive to investors (particularly institutional investors) who dislike non-voters. When that happens, the voting shares may get a 10% to 20% premium over the non-voting shares in return for sharing control of the company. So, if you can buy the voting shares of a dual-share company for less than, say, a 5% to 10% premium over the non-voting shares, it can be a worthwhile investment.

Note that most Canadian stocks with dual-class shares have far fewer voting shares outstanding, and they trade far less actively than the non-voters. However, for long-term investing, having a vote is more valuable than a high level of liquidity, since the voting shares will tend to trade at or above the non-voters.

That’s why we recommend that you buy the voting shares when they trade at roughly the same price or less than the non-voters.

How to invest in Canadian stock market: The three parts of our Successful Investor approach

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What has your experience with brokers been like?

Do you like working with a broker, or do you prefer to invest on your own?

This article was originally published in 2011 and is regularly updated.