If you can use Facebook, you can manage a discount brokerage account

The majority of individual investors have so far shied away from opening a discount brokerage account. I think the main reason is that they view the process as more complex than it really is.

I am an occasional Facebook user, but I must say, even though I consider myself overall moderately online sophisticated, I find aspects of the Facebook interface intimidating. Yet from early teens to grandparents, there are almost two billion Facebook users worldwide.  There is no doubt that most people can become proficient Facebook users, and value the experience. I would argue that operating an online discount brokerage account is no more difficult than using a Facebook account. Indeed, for me I find it simpler.

Overview of a Discount Brokerage Account

Let's start from looking at how a discount brokerage account works. With a discount brokerage account you purchase and sell individual stocks from the Canadian and US markets, as well as bonds, and exchange traded funds (ETFs).  Most discount brokerage accounts also allow purchase (and redemption) of mutual funds, and many also give you access to investment savings accounts and guaranteed investment certificates (GICs).

Most individuals will want to open several accounts, for example an unregistered account, an RRSP and a TFSA.  These will all show up in your list of accounts when you log on to your discount brokerage account. You will have an account number (and/or user name) and password to log in to all of your accounts at once held in your discount brokerage account. The display will show you the list of holdings in each account, along with information on how well each has performed.

Your discount brokerage account will also normally be linked to one or more external bank accounts, and you will transfer funds into or out of the brokerage accounts from these accounts. You fill out forms, and use a cheque, to initially set up these linked accounts.  For accounts with the same financial firm (e.g. Scotiabank bank accounts with a Scotia iTRADE account), the transfers will normally occur immediately, while linked accounts to another financial institution will normally take two days for funds transfer.

Each discount brokerage account will have a cash component, or possibly two, one in US funds and one in Canadian funds. These cash funds normally earn no interest, so you generally only keep small amounts as cash in the long term.

You use funds available in the cash component to buy stocks, ETFs, bonds or other items.  The process for a stock or an ETF purchase are identical, since they are both traded on a stock exchange.  You purchase these in numbers of units, and you must find the code for the stock or ETF you wish to purchase. For example, if you wanted to buy the Bank of Nova Scotia on the TSX the code is BNS (sometimes written as BNS-T to indicate the Toronto Stock Exchange).

 In a future post we will talk about how to decide how much to offer to pay, but in general you will use what is called a Limit price, which means you set the maximum amount that you are willing to pay. You can also specify how long you want your offer to purchase to remain open, from the current day up to several weeks in the future, and may select options such as only complete the trade if it is possible to trade the full number of units.

Before it is confirmed, you will have an option to check your order, making sure that the code for the stock and the price/time period are both correct. Normally you use a second code, different from your password, as trading confirmation.

When the discount brokerage finds a seller willing to sell that stock or ETF at your limit price, they will conduct the sale on your behalf, and the units will then show up in your list of holdings.  It is possible that they will purchase the units from several different buyers, so they may not all show up at the same time (or ever). You have an option to cancel an order that has not yet been filled.

You pay a commission on most purchases (there are exceptions we will cover in a future post), both when you buy the units and when they are sold.  For this reason, it is normally not wise to purchase small numbers of units, but rather save until you have sufficient funds to buy a larger number.  The commission charged typically ranges from about $5 to $15.

When you are ready to sell stocks or ETFs, the reverse process is similar.  You set a price, and time period, and your discount broker will seek to find a buyer, and when the units are sold they will disappear, and cash will appear in your cash part of your discount account, where it can be transferred to other bank accounts.

Note that there is a delay between when the sale or purchase occurs, and when the transaction has settled.  It is only when it is settled that the funds are available to transfer out, although your discount brokerage may allow you to use the funds for another purchase in the interim.  The delay from trade date to settle date is normally 3 to 4 days for stocks and ETFs.

With most discount brokerage, unless you pay a higher fee, you must place the order during regular trading hours (9:30 am to 4:00 pm Ontario/Quebec time).  You can set the time period as over a number of days or even weeks, but you must place the order when the stock exchange is open.

Purchase of mutual funds is similar but simpler.  These are normally purchased in dollars (rather than number of units), and you don't set the price as it will be at the current price automatically. The mutual fund will have a code which includes letter for the fund company and a number for the type of mutual fund.  For example, MAW104 is a balanced mutual fund from Mawer. You can place the mutual fund order at any time, but there will be a certain time that is used to determine which day's fund price will be used for the purchase.

The bond process is somewhat similar, but different enough we will not cover it here.  Our recommendation for most individuals is to hold your bonds through ETFs, rather than through direct bond holdings.  We also have not covered items such as margin accounts, which we do not recommend, at least for someone beginning with a discount brokerage account.

What a Discount Brokerage Account is NOT

A discount brokerage account is not a financial advisor.  While there are tools that will allow you to research information on mutual funds, stocks, exchange traded funds and ETFs, a discount brokerage account is not intended to offer you any advice on what you should hold in your portfolio.  It is a tool to buy and sell investments, not guidance on what those investments should be.

You are in charge, and you make the decisions of when and what to buy and sell. Your discount brokerage should provide an easy to use interface to do this,  at a reasonable cost. It should provide transparency on your holdings and their performance over time.

Canadian Discount Brokerage Companies

The major banks offer discount brokerage accounts, as do a number of other companies.  Here is a list of some of the main players in the Canadian market.

• BMO InvestorLine
• CIBC Investor's Edge
• Desjardins Online Brokerage
• HSBC Invest Direct
• National Bank Discount Trade
• Qtrade Investor
• Questrade
• RBC Direct Investing
• Scotia iTRADE
• TD Direct Investing

Rob Carrick regularly reviews discount brokers.  Moneysense also review discount brokerages.  I strongly recommend reading these reviews to narrow your choices, but then consider the list below on what to look for in a discount broker to see which is the right fit for you, rather than simply going by the overall letter rating.

What to Look For in a Discount Broker

We could write a number of columns on what to look for when selecting a discount broker, but at this time will offer a list of some features.  You should decide which are most important to you.

• Commissions Since most trades will result in commissions, both at the time of purchase and sale, it is important to be clear on these costs.  Some companies will have different commissions depending on how active you are as a trader, and/or how much you have invested, so be sure to know the commission that will apply to you.
• Other Fees  Some companies have other fees for certain types of accounts if the amounts held are less than a certain minimum.  There will also normally be fees for closing an account.  Be clear on the other fees that you are likely to incur.
• Exchange Rates  If you plan to hold US dollar stocks or ETFs find out how currency exchange works, and whether you can hold cash in US dollars (for example if you sell a US stock, and then want to use that money to buy another US stock, can you keep it in US funds to not incur two currency exchanges).
• Ease of Use  Some discount brokerage accounts are easier to use than others, so try to use independent ratings to narrow your search to two or three finalists, and then have them demonstrate their platform before you make your final selection.
• App Most discount brokerages have some sort of app to use with their accounts, but this may have limitations compared to the full web access.  If this is important to you, check out the features and ease of use of the associated app on your platform of choice (iOS or Android).
• What Can You Buy  If you plan for your portfolio to hold mutual funds as well as stocks and ETFs, make sure that your discount brokerage allows this (and not just for mutual funds from that financial institution). If you would like to hold GICs within your investing accounts, see if that is available.
• Research While there are many sources of research outside of your discount brokerage, it is certainly convenient if you can get detailed research information, including analyst reports, within your discount brokerage account.  Ask what is available before you make your final decision.
• Reports You don't want to have to separately manage reports so that you will know how much income your LIF or RIF accounts will generate in the next year, or what the overall past performance of your different accounts have been.  Make sure that this, and more, is readily available. When you sell instruments you will need to pay capital gains income tax on the profit, so it is important that Realized Gain/Loss is also readily tracked.
• Linked Accounts Make sure the process is easy to link ideally more than one bank account to your discount brokerage.  If you find everything else about equal, there are advantages to setting up your discount brokerage account with the institution you currently bank with.
• Stability It is cumbersome to change discount brokers, so make your initial choice carefully.  Consider how stable the institution is, and how confident you are that they will still be operating in the discount brokerage field in 20 years (or whatever your investment horizon is).
• Special Features  Almost all of the companies will offer special features, like inducements to set up an account (agreeing to pay transfer fees or offering so many free trades), items that will have no commissions on purchase or sale, etc. Is a practice account important as you get familiar with trading, and if so is one offered? One advantage of the TD Direct Investing is that it provides access to the TD e-Series. Scotia iTrade have about 50 commission free ETFs if you set up your discount brokerage account with them.

Final Thoughts

If you still feel that a discount brokerage is not for you, you may want to consider a financial advisor who will, in addition to offering advice on what you should hold in your investment portfolio, assist with the mechanics of purchasing stocks, ETFs or mutual funds on your behalf.  Discount brokerage firms such as Scotia  iTRADE have forms that allow you to designate someone as a trading authority on your account.  The account will be yours, but they will be able to make trades on your behalf (but not withdraw funds from your account).  It is sort of like learning to fly, having a pilot and co-pilot, either one of which can run the show.  If you feel comfortable giving this role to a trusted family member, your designated trading authority does not need to be a financial professional.

If you don't want to get involved at all in a discount brokerage account, then a robo-advisor might be the best choice for you. We will cover these in a future column, but essentially you provide a profile online about your situation, plans, risk aversion, etc., and the robo-advisor will make a choice on how you should be invested, and purchase the instruments (usually ETFs) for you.

Another option is to use a balanced mutual fund, which can be purchased through an institution or advisor or directly in some instances such as the Tangerine Investment Funds).

But our central argument is that operating a discount brokerage account is not rocket science.  If you do online banking to pay bills and transfer funds, you can learn to handle a discount brokerage account. If you use Facebook proficiently, you are already over-qualified, in my opinion! With a discount brokerage account you will have access to many excellent low-cost investment vehicles that are not otherwise available to you.

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column has a number of discount brokerage accounts, registered and unregistered, held through Scotia iTRADE, and has been a long term investor using that platform since its inception. No compensation by any company, organization or individual has been offered, requested or received for writing this column, and no association is implied.

Mutual Funds vs Exchange Traded Funds

While purchase of individual stocks and bonds makes sense in some investing plans, for most seeking a diversified investment portfolio, mutual funds or exchange traded funds (ETFs) will be the choice.  In this post we introduce these products, and examine the differences and similarities between these investment vehicles.

Mutual Funds

Mutual funds are offered by all of the major financial institutions, as well as by companies operating only in the mutual fund space. The folks at FundLibrary keep track of the Canadian funds available (using the Fundata Canada database), and as of early 2017 there were 17,471 different mutual funds operated by 449 companies in Canada. The actual number of funds is larger still, since a number of funds have different clones that hold essentially the same products (there may be a form of the fund when it is sold through a discount brokerage, and a different form for those sold through financial advisors).

You can purchase mutual funds through your financial institution, through some financial advisors, or through a discount brokerage (in a few cases those with large holdings can purchase them directly from the fund company).

The expense structure for mutual funds can be complicated, but the situation is becoming simpler and much more transparent due to recent legislation. You will pay a percentage of the holdings each year to account for the operations of the mutual fund (the costs of purchasing and selling stocks, administrative costs, etc.) There may, or may not, be charges at time of purchase or redemption in addition.  We will look in detail at the costs of mutual funds and ETFs in a future column.

Some mutual funds track an index (e.g. the TSX Canadian stock index, or a bond index), but many have a more complicated structure, aimed at for example providing regular income or providing the right mix of stocks and bonds for a certain retirement age.

If one is going to just hold a few financial products, a balanced fund, that holds a mix of stocks, bonds and possibly other instruments, can be the simplest choice. For example, the Phillips Hager & North (PH&N) balanced mutual fund RBF1950 holds a mix of about 36% bonds, along with equities from Canada, the USA and internationally. By going to the information sheet linked above you can see the holdings, cost, and past performance of the fund.

Exchange Traded Funds (ETFs)

As the name implies ETFs are bought and sold on a stock exchange.  For most individual investors it will only be economical to hold ETFs if you have a discount brokerage account (a topic for a future column).  You purchase and sell ETFs through this brokerage account.

In Canada the major players in the ETF field are iShares by Blackrock,  BMO Asset Management, First Asset, Horizons ETFs, and Vanguard Investments Canada,

The idea of an ETF is that it holds a number of financial products, usually stocks or bonds, in a package. In most case the products held match some index (or compilation of several indexes according to a formula).

For example, the iShares XIC ETF tracks the Canadian composite stock index, so in one product you hold essentially a bit of each company on the TSX, in proportion to the size of that company.

As another example the Vanguard VUN ETF tracks essentially the entire US stock market, with an index including companies of different sizes and from all sectors.  It holds a little more than 3500 individual stocks.

Some ETFs hold bonds, with a common example being the Vanguard VAB ETF, which invests in high quality government and corporate Canadian bonds with a variety of durations.

Comparison

As the above demonstrates some ETFs and mutual funds will hold very similar products, although in general more mutual funds are active, in the sense of not simply tracking an entire stock exchange index. They have a lot in common, in that they both hold a number of products, usually at least 50 and often thousands of individual stocks.

• How bought/sold:  ETFs are bought and sold on a stock exchange, while mutual funds can be bought and sold without a brokerage account. You sell ETF's in terms of number of units, while you redeem mutual funds in dollar amounts generally.
• Price: The price of a mutual fund is set once a business day (at end normally), and you redeem or purchase at this price in dollar units (there is usually some minimum price).  The cost of an ETF will, like a stock, go up and down throughout the day. 
• Guarantee/Risk: There is no guarantee on the value of either a mutual fund or an ETF. These are not like investment bank accounts and GICs and they do carry risk that you can lose principal value. The amount of risk depends on what the holdings are in the ETF or mutual fund, rather than one being in general more risky than the other.
• Costs: We will explore this in more detail in a future post, but in general the annual management costs will be lower in ETFs and in mutual funds. However, there will be a per transaction cost so when you buy and sell ETFs there will be this additional cost (there are exceptions we will explore in future columns). In general it does not make sense to do frequent trading in small amounts of an ETF due to these costs.
• Transparency: In general both products are transparent regarding holdings, past performance, etc., although the situation is most clear for ETFs that track an index.
• Reinvestment: Normally ETFs will offer a DRIP option to reinvest dividends in additional units, if that is your wish, and normally mutual funds can be set up similarly if desired.
• Name: Most ETFs have a three letter stock exchange designation, such as VAB or XIC, while in general mutual funds have a combination of letters and numbers in a longer name such as RBF1950, with the first letters designating the mutual fund company (RBF means Royal Bank Fund, who handle PH&N funds now) and the latter part being the number of the actual mutual fund.

This posting is intended for education only. The reader is responsible for their own financial decisions.  The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  The author of this column holds funds in the mutual fund (RBF1950) and all ETFs mentioned in this column (XIC, VUN, VAB).