Opening Your Online Brokerage Account Primer
Buying and selling Exchange Traded Funds (ETFs), owning your individual stocks or other securities through an online brokerage firm is not difficult work but this can be very intimidating work for new investors.
That said, this post will absolutely help you open your online brokerage account.
Thankfully, beyond this post, many online brokerages have excellent Frequently Asked Question (FAQ) forums not to mention a team of Customer Service Representatives ready by the phone and via email to answer any questions new or experienced investors might have.
For today’s post, I thought I would share some considerations and prime you about opening your online brokerage account – thanks to a recent reader question.
Consideration #1 – Do you even need an online brokerage account?
You might already be aware these types of accounts were established to allow investors to buy and sell securities on their own. Before you go any further I suggest you figure out if managing your own securities is the right step for you. It might not be. Do-It-Yourself (DIY) investing takes some effort, even for Couch Potatoes, so consider what your financial goals are, what your risk tolerance is and the types of investments you want to hold.
Should you become a DIY investor? I think you should definitely consider it!
If you don’t know the answers to these questions yet, best seek some professional financial advice to get you started or at very least sit down and read some personal finance books. Opening any online brokerage account before knowing these answers is like buying a plane ticket before you know any of your travel plans.
Consideration #2 – What types of accounts?
New investors need to understand there is a cascade at work when it comes to investing. What I mean is this: there are many major discount brokerages in Canada (names to be provided later) and these financial institutions have many different accounts you could own:
- Registered Retirement Savings Plans (RRSPs)
- Tax Free Savings Accounts (TFSAs)
- Registered Education Savings Plans (RESPs)
- Self-Directed Non-Registered Investment Accounts and more.
It is within these accounts where you can hold a diverse mix of investments: mutual funds, ETFs, stocks, Guaranteed Investment Certificates (GICs), bonds and even cash. And finally within the investments themselves there can be diversification: some ETFs for example hold thousands of companies (this is a good thing). I would suggest to take some time to read up about the different types of accounts offered by many major discount brokerages, revisit what they offer and more importantly what they don’t offer as part of their terms, conditions and services and from there determine what accounts might be right for you.
Sometimes, just starting with one account like a Tax Free Savings Account (TFSA) may be a good way to get your feet wet. Here is some additional reading for you:
For most younger investors just starting out – consider opening a “self-directed” TFSA or RRSP or both. This way, you can control the stocks, ETFs, bonds, GICs and other to buy and hold.
Consideration #3 – Narrowing your choices – comparing brokerages
So before this post I will assume what your financial goals were, what your risk tolerance was and the types of investments you wanted to hold. As part of the guidance within this post you learned a bit about the accounts you can open. Now you need to figure out the best financial institution for the accounts that meet your needs – this is because not all online brokerages are created equal. I won’t go into details at this point, the expert writers at MoneySense have already done a stellar job of that outlining “the best” online brokerages in Canada for a few years now.
Here is some information below to help your research:
Not all brokerages are created equal…
What I would highlight from my personal experiences are these brokerage considerations:
- Be mindful of the account fees – fees matter. Although many major discount brokerages in Canada have done a great job at lowering or eliminating annual fees for accounts that do not have a modest balance (say $5,000 or $10,000 invested) or no minimums for TFSAs, the account fees across the brokerages are different. So, do some research on that. Make sure you ask the following questions of your brokerage:
- What are the account minimums to waive any fees for my TFSA? RRSP? RESP? RRIF?
- Will you at least waive fees for the first year or so? If not, why not?
- Be mindful of the trading fees – excessive trading can kill portfolios. Although many major discount brokerages in Canada have done a great job at lowering their transaction costs to buy or sell securities, the trading fees across the brokerages are different. For example, you can buy any Canadian or U.S.-listed ETF from Questrade commission-free, whenever you like. The same cannot be said for other online brokerages. So, do some research on that. Make sure you ask the following questions of your brokerage:
- What are the fees for buying or selling ETFs?
- What are the fees for buying or sell stocks?
- How do those fees come out of my account?
- Be mindful of the foreign exchange fees – brokerages take a healthy cut. Although many major discount brokerages in Canada have introduced U.S.-dollar accounts, some brokerages remain in the Stone Age and do not allow you to hold U.S.-dollars inside some accounts. So, while you can buy or sell U.S.-listed ETFs or U.S. stocks in your RRSP or TFSA, the currency will be converted automatically to Canadian dollars and because of that you’ll be charged a pricey foreign exchange fee on every transaction. So, do some research on that. Make sure you ask the following questions of your brokerage:
- Can I have both U.S.. and Canadian-dollar TFSA or RRSP accounts? (Yes, you should get those.)
- Can I buy Canadian inter-listed stocks and “journal them” over to the USD-side to save money on foreign exchange costs? If so, how do I do that? Can you show me how? Read up about Norbert’s Gambit here.
- What is the best way to contribute to these accounts? Can I set up contributions as an automatic bill payment? If so, can you show me how?
- Be mindful of the brokerage that can DRIP (Dividend Reinvestment Plan) – DRIPs can help put your retirement plan on autopilot. Although many major discount brokerages in Canada allow you to reinvest dividends and distributions for every security you own some don’t. So consider if you want to leverage DRIPs for your investments and confirm with the brokerage they offer this flexibility for the account(s) you’ve selected.
You can learn more about DRIPs on my site here.
I can appreciate for new investors this information might be overwhelming. I’ve given you lots to think about, there is a lot to think about.
This is why DIY investing is not for everyone.
If you are considering the DIY route hopefully these considerations and questions to ask your discount brokerage helped.
Thanks to my reader for this blogpost idea and should you have more specific questions don’t hesitate to comment or drop me an email, I will answer your questions as best I can. Alternatively I might just turn any comment or email into another article on this subject.
Oh, lastly, as promised “Google” this list of online brokerages for your research and check out any links above.
- RBC Direct Investing
- BMO InvestorLine – see my link below where I can save you money!
- CIBC Investor’s Edge
- TD Direct Investing
- Scotia iTrade
- Questrade – see my Deals page!
- National Bank Direct
- Qtrade Investor
- Virtual Brokers
- Laurentian Bank Discount Brokerage
- HSBC InvestDirect
- Credential Direct
- Desjardins Online Brokerage
Better still, consider my Deals page where I have promo codes to use for Bank of Montreal investing! Using my promo codes I can save your hundreds if not thousands of dollars over many years of investing as your go-to discount brokerage.
Happy investing folks and thanks for reading!
Can you please write a post on Interactive brokers. Heard that there is no minimum deposit.
Will appreciate your research and thoughts.
I will give that some thought Harry. Cheers.
thanks mark for this article. this is a big help to me who is just starting to explore DIY investing.
Excellent to hear Helen, thanks for the inspiration.
Fees based on account value are an issue at times.
My wife had a spousal rsp and a regular rsp plan, both of which we transfered to a discount broker. Although the total value was greater than $200,000, the broker tried to charge a $200 annual fee on one account because it was less than $50,000.
They eventually backed off on the fee and merged the accounts at no cost.
Good for you. I’ve found if you get the right agent, and you state your case, the brokerages are rather reasonable – they can waive fees.
I’m with Desjardins Disnat with 9.95$ commission fees per transaction without any annual cost. One of the thing I like is the capability of selling and buying US titles in the same day in my RRSP without having to pay anything for the US CAN conversion.
My major concern right now is the cost of withdrawing money from my RRSP. My RRSP portfolio is currently build to provide me with a monthly dividend income of $800 – will probably be at $1000 when I will retired – that will be withdraw every month. With 25$ fees for each withdraw – cheaper than some other, I agree – it is a 2.5% charge! Letting the dividend there at near 0% and making a withdraw once a year is not a good option too.
So I’ m looking for an online brokerage account that will be really designed for people who are planning to make several withdraws per year.
Hey Hemgi, thanks for the extra information about Desjardins.
My understanding is all RRSP withdrawals are treated equally, they are subject to withholding taxes. You may wish to consider converting some of your RRSP into a RRIF:
For some folks then, RRSP > RRIF at age 65 can be a plan: you get the pension tax credit ($2,000) and income withdrawn is eligible for pension-splitting. At age 65, minimum withdrawal = 4% from a RRIF. Essentially the first $2,000 from the RRIF is essentially tax-free thanks to the pension tax credit.
This is considerable less than the forced withdrawal of 7.5% when the RRSP must be converted to a RRIF.
Not sure how old you are Hemgi but a consideration.
I m 54. 🙂
Thank for the info on the RRIF, I will look at it.
The tax rate is not a concern, everybody will be it. I’m more concern with the administrative fees associated with withdrawal of cash…. Pretty annoying.
Indeed. I’d have to do some research, call brokers, to see if there are ways around the routine administrative fees. I just don’t think so unfortunately Hemgi.
Good point about trading costs, I can’t stress this enough. For a lot of us less is more since trading fees can add up so fast
For sure. I’m trying to keep my transaction costs between $100-$200 per year.
Well, TD is promising USD in registered accounts by 2014 year-end. Lets see if they make it this time…
Time will tell B, thanks for the update.
Great post. You really need to check the account fees, especially when it comes to registered accounts. It never makes sense to me that some brokers charge fees for registered accounts like RRSP and TFSA.
I agree Tawcan and I don’t get the cash-grab on RRSP or TFSA accounts. Annoying really but banks are in the business to make money, and they do a very good job of that.
Well you certainly did give me lots to think about. I knew you’d write a post like this sooner or later. I’m the one who wants to get his feet wet. I do have plenty of room in my TFSA although I’m with an advisor at the moment. That doesn’t mean I have to use him for all of my investments. I’ll start reading some of your 101 suggestions and look into it further. When you first started out on your own what did you invest in? What mistakes did you make? How did you combat being nervous investing on your own, if you were at all?
Good, this is what this site is for Mr. CBB 🙂
Let me know what the hesitations are and maybe I will write another post about that. When I first started out, I invested in the banks’ mutual funds. I then figured out after a few years, why don’t I just own the same stocks the big bank funds do? So, now I do.
What mistakes did I make? Not many actually, other than paying too much for the funds, the MERs were high and I could have gotten the same and better performance in lower-cost products.
Not nervous at all. I figured I more I read, the more I read other blogs, the more knowledge I gained.
Thanks for your questions.
Great post. I wanted to emphasize the point you made about fees, in particular the account fees. While the online brokerages are pretty upfront about their trading fees, the account fees can be a little harder to tease out – partly because we may tend to not even think of this at first. Things to consider that weren’t already mentioned:
– What fees are associated with closing the account?
– How often do they change (i.e. increase) their annual account fees – for those people who have to pay them?
– Will they waive the account fee even if you don’t meet the minimum balance?
My analogy is like when first time homeowners obtain a mortgage and only think about the rate (like the trading fees). Digging a little deeper, they will find out about the other aspects such as prepayment options, lump sum payments, etc… (similar to the account fees).
Last thing, get a copy of the fee structure – both trading and account fees – in writing. The brokerages may have basic information on their website, but it has been my experience that this may not necessarily match their actual policies/ rules. I encountered such a situation with one of them recently when my statement indicated that “… your $100 annual fee will be deducted from your account on Sept. 12th” After a phone call I was told that this was just for RRSPs, not my TFSA.
You’re right Shawn, the closing fees and other fees can really add up. New investors need to take these things into consideration, which is why they need to review as much as they can on each brokerage site before they make any decisions.
If they don’t understand the terms, the conditions, the lingo, they are best to seek financial help.
You made some good points, thanks for your comment.