Discount brokerage

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A discount brokerage or Order Execution Only (OEO) firm is a business, registered as an investment dealer,[1] that allow investors to buy and sell securities online. In 2019, there were over 200 brokerage firms in Canada (including discount and full-service brokerages), but the 10 largest firms — eight of which belong to banks and credit unions — generated 85% of the industry's sales.[2]

Discount brokerages, also called online brokers, typically offer both registered accounts and non-registered accounts. The types of products that can be purchased in these accounts include exchange-traded funds, stocks, bonds, GICs, mutual funds, and others. Therefore, discount brokerage accounts are suitable locations to build investment portfolios for retirement or education purposes.

Discount brokerages usually allow their clients to trade for their own account with little or no action with a live broker. In addition some brokers offer no-commission trades to their clients that hold a balance greater than a specific amount with them. Typically, discount brokers provide advanced electronic trading platforms which may be appealing to frequent and active traders but may deter some novice investors. Discount brokers charge comparatively low fees but typically do not provide financial advice or guidance and provide instead a service aimed at self-directed investors.

This article first compares discount brokerages to traditional (full service) brokers. Then the types of products offered by discount brokers are listed. Criteria useful to select a discount broker that suits your needs are given. Finally the article discusses the issues of dual currency support (Canadian versus US dollars) and what happens to your account if a broker goes bankrupt.

Discount versus full service brokers

Discount brokers charge clients significantly lower fees than a traditional (full service) brokerage firm but without providing investment advice. Before the advent of discount brokers it used to be that only the wealthy could afford a broker and access to the stock market. However the development of internet and electronic trading helped to develop discount brokers, which allow investors to trade for much smaller fees. Traditional brokers in contrast will often provide financial advice and investment planning as well as related wealth management services.

Available products

The types of products that can be purchased in a discount brokerage account include:

How to choose a discount brokerage

Commission and fee structures

When comparing discount brokers, commissions used to be the number one differentiator between online brokerage firms.[3] In the first two months of 2014, a number of Canadian discount brokerages reduced their commission fees below $10 and eliminated minimum account balances or trading activity levels to qualify for this rate. As of 2019, all 13 biggest discount brokers reviewed by MoneySense have a Basic online equity trading commission under $10.[4] Also, some discount brokers allow commission-free purchases (sometimes sales too) on all or some ETFs.

When choosing a discount broker, you should also check their fee schedule to determine if there are annual fees associated with various accounts (typically registered accounts) and transfer and withdrawal fees. The discount brokers website will typically have a fee schedule available. Some discount brokers waive these fees based on trading activity and/or the total value of the assets with the broker. The total value of assets generally is based on all accounts that have the same mailing address.

Other selection criteria

Because the commissions and annual fees have come down, recent broker reviews emphasize other selection criteria such as the ease of opening an account, ease of navigation, customer service, account reporting, market data and research, innovation, etc. [5] [6] [7].

Additional broker features sometimes discussed on the Financial Wisdom Forum include:

  • Are bonds and GICs available online, or do you have to call?
  • Ease of performing Norbert's Gambit to inexpensively convert CAD to USD or vice versa, in various types of accounts

Depending on which criteria an investor emphasizes, different brokers will be favored.

Broker rankings

Rankings for Canadian discount brokers can be found under list of discount broker rankings.

Dual currency support

See also: Currency hedging

Canadian investors can purchase securities on Canadian exchanges and US exchanges. When purchasing and holding securities trading on US exchanges, an important consideration is whether the discount brokerage supports both Canadian dollar accounts and US dollar (sub)accounts. The level of support varies between the different discount brokerages. Within a discount brokerage, their level of support may also vary between non-registered and registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESP) and Tax-Free Savings Accounts (TFSAs).

Dual currency support is now standard for non-registered accounts. For registered accounts such as RRSPs, 10 out of the 12 major online brokers reviewed by MoneySense in 2020 offered dual currency support.[8]. It is not clear if this also includes RRIFs and RESPs, so if you are looking so open such accounts, investigate carefully.

Broker bankruptcy

When choosing a discount brokerage, make sure it is a member of the Canadian Investor Protection Fund (CIPF). In the event of broker bankruptcy, your accounts will be protected for up to $1 million per account category: (1) cash accounts, margin accounts and TFSAs combined; (2) all registered retirement accounts combined, including RRSPs and RRIFs; (3) all registered education savings plans (RESPs) combined.[9]

Getting started

Transacting through a discount broker is not rocket science, but there is a learning curve involved. Novice investors may want to set up a practice account with their chosen broker to get familiar with the trading platform without committing actual money. See "How to build an ETF portfolio at..." below.

A few tips

Tips for long-term investors buying individual stocks or ETFs include:

  • Place orders only within market hours (typically 9.30 A.M.-4.00 P.M. Eastern Time in Toronto and New York), not before or after[10]
  • Furthermore, avoid trading during the first and last 30 mins of the session (during which markets are the most volatile and spreads can be higher)[11]
  • Use limit orders[12]

See also

References

  1. ^ Canadian Securities Administrators, Guide to Understanding Registration, viewed January 10, 2014.
  2. ^ RRQ - Securities Brokerage Firms - Flash Retirement, viewed April 4, 2020.
  3. ^ Carrick, Paying more than $10 a trade? You’re doing it wrong - The Globe and Mail (subscription required), viewed March 12, 2014.
  4. ^ Best online brokers in Canada 2019 comparison, MoneySense, viewed April 4, 2020.
  5. ^ Canada's best and worst online brokers in 2014, The Globe and Mail, viewed November 28, 2016
  6. ^ The Globe and Mail's 17th annual online broker ranking - The Globe and Mail, December 2015, viewed November 28, 2016
  7. ^ Canada’s Best Online Brokers 2016, Dan Bortolotti, MoneySense June 2016 issue (subscription required), viewed November 28, 2016
  8. ^ MoneySense, Best online brokers in Canada comparison 2020, viewed January 9, 2021
  9. ^ Canadian Investor Protection Fund (CIPF) -- What Are the Coverage Limits?, viewed Nov. 26, 2016.
  10. ^ Canadian Couch Potato blog, ETF Investors: Avoid the After-Hours Club, June 17, 2013, viewed January 20, 2021.
  11. ^ The two times during market day when investors should never trade, CNBC, ETF Strategist, January 27, 2017, viewed January 20, 2021.
  12. ^ ETF market makers advise using limit orders, Investment Executive, March 31, 2014, viewed January 20, 2021.

Further reading

Over the years on Financial Wisdom Forum there have been a significant number of discussions about various aspects of discount brokerages. You might find it helpful to review some of these topics (please note that there has been some minor editing of the topic titles).

General

Specific discount brokerages

Full service brokerages

For a discussion of full-service brokerages, see

External links

How to build an ETF portfolio at...

A series of YouTube videos from Justin Bender for those who have never used a discount brokerage account:

Other

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