Saturday, January 22, 2011

So you want to make the plunge!

It's about time you got your head out of that bucket!  Your savings account isn't going to help do anything thanks to the all-mighty inflationary pressures the world is under right now.  (Central banks are printing money hand-over-fist to pay the bills.  How else do you think the USA hasn't folded when they post multi-trillion dollar deficits year over year?)

So what will you need to start buying stocks?  A brokerage account.  There is nothing terribly special about brokerage accounts and all of our big banks offer a variety of different "service" options ranging from Full Service (painfully expensive... great for super-rich people) down to discount brokerages which offer you direct access and some research tools.

I prefer discount brokerages because if you make even a handful of small trades, the small commissions will save you money and let you buy more shares/units/positions and help keep more money working for you.  Discount brokerages typically offer fixed pricing and flat rates per trade.  Most of the offerings in Canada will be in the $4.95-$19.99 range per trade.  The old "discount" brokerages from the big banks charge $28.95 per trade unless you make some hideous number of trades per quarter and then they offer you a slightly better rate after you "qualify".  Some discount brokerages will also offer better rates if you have a certain amount of holdings and will also give you a better "platform" (think user interface) for free.  Don't worry about platforms just yet.  They typically are for folks who are making dozens of trades per week or even per day.  (The jittery, over-caffinated day traders who can have great success if they can see through market jitters and other typical market rubbish).

Lastly full service brokerages typically charge $125 per stock trade!  This means if you want to buy 100 shares of Wonderful Widgets Inc.  (Not a real company) @ 1 per share then your actual cost per share is $2.25.  So this means Wonderful Widgets has to over double in value before you break even!  It actually has to triple in value before you can cash out with the same $100 you started with.  (Each stock buy or sell costs you commission!)  With your discount broker your $100 trade costs $110.00  ($10 commission) and to break even when you sell your cost for the stock + the commission to purchase + the commission to sell adds up to $120.  This means Wonderful Widgets only has to go up 20% in value for you to break even.  20% is a far more realistic return in a year or two than a 300%+ return if you had done this with a full service brokerage.

So you can see how with even a few trades a year this can really add up.  But please remember, discount brokerages typically offer FLAT rate commissions.  Which means it doesn't matter if you buy 1 share or 1,000,000 shares.  You will still pay the same flat-rate.  So you can see that it's typically better to buy larger quantities of shares if you have the cash for it.

Now back to opening your account.  There is one brokerage in Canada (that is Canadian owned and operated) which is the best deal for low cost.  (Full disclosure I am NOT with this brokerage!  But my wife is)  It's Questrade.  They offer "flat" rate commissions starting at $4.95 which will go to a maximum of $9.95 depending on how many shares you buy.  (100 shares = $4.95, 1000 shares = $9.95)  So with this broker, go ahead and buy 100 units of Wonderful Widgets!  The company will only have to go up in value 10% for you to break even on the transaction.  (Or less if they pay dividends!)

Full Disclosure:  I'm with Scotia Itrade.  I have enough money in my accounts with them to enjoy a flat rate of $9.99 per trade.  I had been formerly with one of the big bank's old "discount" brokerage paying a whopping $28.95 per trade.  I did have a busy year last year and did qualify for $14.95 eventually.  Bank of Nova Scotia bought out "e-trade" a few years ago and morphed it into Scotia Itrade.  I was able to transfer from ScotiaMcleod to Itrade for free and almost instantly without hassle because they are both a division of Scotia Capitol Inc.  I didn't switch to Questtrade for a couple reasons: "Release" fees charged by brokerages if you want to transfer out your holdings to another company.  (Registered accounts like RRSPs, TFSAs and RESPs have a lot of paperwork for the company to process if they have to surrender it to another institution so they charge you $125 to $150 PER ACCOUNT for this "service".)  Many brokerages offer to pay this fee for you provided you of course have enough funds.  (I think it's about $25,000 per account)  A $10 commission charge is small enough so that I don't feel upset about it.  And most of my busy market trading is 1000 units at a time so the premium per share is only a penny!  (So the stock only has to go up $0.02 each for me to break-even)  And since the commission at quest is $9.95 when you're trading 1000 shares or more the difference is only $0.05 per transaction.  This of course would require THOUSANDS of trades to make it better to switch to quest.

Now that you've decided on your brokerage of choice it's time to open an account.  The online process for most discount brokerages is simple enough.  You will have to answer a bunch of questions (which are required by the regulators) so it's tedious and you might not really understand what's going on.  The application process does include lots of help along the way so you should be able to work your way through it in about 15 to 20 minutes.  Once your account is funded you're ready to place your first order!

I HIGHLY recommend using a registered account for your trading.  This will shield you from having to list the details of EVERY transaction and give them to your accountant at tax time.  It will also protect you from having to pay taxes on any monies you make.  So a TFSA account is a great place to start because it's recently new in Canada and you won't have to pay taxes on the money when you withdraw it.

Next time: placing your first order, and what the heck should I buy first?

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