Use these strategies to uncover the top TSX stocks, including undervalued stocks that could boost the value of your portfolio

The Toronto Stock Exchange (TSX) is the largest stock exchange in Canada and the third largest in North America. Of note is that the TSX has more oil and gas companies listed on it than any other stock exchange in the world. That’s also reflected in the S&P/TSX Composite Index, commonly called the TSX index. The Toronto Exchange opened for trading on October 25, 1861. The TMX Group operates a number of stock and commodity exchanges, including the TSX.

Here’s how to uncover the top TSX stocks:

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Top TSX stocks: Learn to find undervalued investments for long-term gains

TSX value stocks are companies that are undervalued, based on a number of measures, on the Toronto Stock Exchange.

Some investors only feel safe buying stocks after prices have risen, which means that they often overlook TSX value stocks. Yet this is the opposite of the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up. When buying stocks, you’ll find this same logic applies.

The first step to finding TSX value stocks is to visit the websites of the companies you are interested in investing in. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day. You’ll be less liable to get caught off guard by price fluctuations and over time you’ll begin to spot the most undervalued stocks in a lineup simply through observation.

In addition to getting to know the companies you invest in, you should also get to know the industries that stocks operate in. Some industries are more volatile than others. Don’t invest in industries you’re not familiar with, and you’ll steer clear of many overvalued stocks.

Consider earnings, dividends and other factors in making decisions. They matter far more than short-term stock-price trends.

Stock prices rise and fall. But strong stocks tend to fall less and rise faster than poor stocks. And don’t overlook top dividend stocks—these companies like to ratchet their dividends upward. Even during market downturns, the last thing a well-established company is likely to do is lower its dividend. When times are good, strong companies will raise their dividends.

Top TSX stocks: Be careful with penny stock investing or you risk losing money

The odds against success are high with TSX penny stocks.

Although the price may seem right, the average penny offers a poor long-term return. After all, it’s hard to create a successful business. It’s much easier and cheaper to set up a company and sell stock to the public. That’s why bad penny stocks always outnumber good ones.

Disappointed penny-stock buyers may next latch on to the P/E ratio—the ratio of a stock’s per-share price to its earnings-per-share—as a tool to find stocks to buy.

Some decide they will only buy stocks with a P/E of 10.0 or less, and that they’ll sell if the P/E goes above 20.0. Compared to zeroing in on penny stocks, this may cut your losses, or even yield a little profit. But that hardly qualifies as successful investing.

Top TSX stocks in ETFs: Understand the characteristics of the best ETFs to invest in

There are hundreds of ETF opportunities on the Toronto Stock Exchange (TSX) sponsored by investment managers like BlackRock Inc., BMO Asset Management and Horizons ETFs Management. The best TSX ETF investments represent a low-cost, tax-efficient way for investors to hold stocks. Investors get the broad market exposure of a traditional mutual fund, but with lower fees.

TSX ETFs trade on the stock exchange throughout the day, much like ordinary stocks. So you can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks.

Note, however, that even though you pay commissions to buy and sell TSX ETFs, they will most likely cost you less than mutual funds in the long run, because the MER (Management Expense Ratio) is generally much lower on ETFs than on those conventional mutual funds. That’s because most ETFs take a much simpler approach to investment. Instead of actively managing their holdings, they generally try to invest so as to mirror the holdings and performance of a particular stock-market index.

This is referred to as “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at a much higher cost. These ETFs passively follow the lead of whoever sponsors the index. Sponsors of stock indexes do from time to time change the stocks that make up the index, however, and they do tinker with the rules for calculating the index. ETFs then change their portfolio holdings to reflect these changes, without considering any impact the changes may have on the future performance of the ETF portfolio.

Use our three-part Successful Investor approach to pick top TSX stocks

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.

Some investors avoid the TSX because they feel it is not diversified enough. How do you feel about this concept?

What has your experience been in finding undervalued stocks on the TSX?