How to Start Investing Wisely: Forget The Banks, Use An Online Broker

Recently I've been asked this question many times by my friends, "how do I start investing?" It dawned on me that a lot of people might not know how to start investing so I decided to write this step-by-step article on how to start investing. 

Purchasing Stocks Via a Bank: Placing Orders Online Vs. Through an Representative

For most people, banks are likely to be their go-to place to open an investment account.  Through a bank, you have two options: you can place an order (purchase) stocks through their online site or through a bank representative. I wouldn't recommend going through the teller to invest because of the commission structure. Here's why.

To have a better idea, let's take a look at the commission structure of an RBC investment account and compare the commission fees for their online service vs. their representative service (as of Nov 9th, 2016).

Here is the commission for the online service. It's not as good as other online brokers but it's not terrible either.

rbc-online
rbc-online

Now, see the commission when purchasing a stock through a bank teller.

rbc-teller-2
rbc-teller-2

Yes that's right. They charge you $35 per trade if you purchase a stock through an representative! If you are only buying $100 worth of stocks for example, that's a 35% loss right there!

I understand that some don't have enough knowledge/confidence to invest and need an advisor. If that's the case, you are reading the right blog. I'll educate you well enough over time that you will be able to invest your money without an advisor.

So should I just use the bank's online investment account?

Some might say "then I can just open an online investment account with the bank!". Well... not necessarily. Depending on your situation, an online discounted broker could serve you way better. I'll show you the steps in choosing a right investment account.

5 Steps To Using An Online Brokerage Account

Whether you like it or not, you most likely have to buy stocks/bonds through brokers (unless you want to use DSPPs or DRIPS). The “brokers” are not an actual person but simply a medium. When I say online brokers, this includes both online discounted brokers and banks. Just think of online brokers (e.g. RBC direct investing, Virtual Brokers, etc.) as a shopping site for investments like Amazon is for books. What's more important is choosing the right broker for your own needs.

  1. Know how much money you can put in an investment account.

For beginners, I wouldn’t recommend putting more than 20% of your savings in the investment account. For example, if your savings is $30,000, your max would be $6,000. You can increase the amount you invest gradually once you feel more comfortable and understand hedging strategies to smooth out the returns.

  1. Know what you want to invest in.

Are you satisfied with purchasing Canadian stocks and U.S. stocks or would you also like to buy stocks from other countries or buy different currencies as well?

  1. Choose your online brokerage

When I started my decision making process for choosing an online brokerage, I used a chart from this Globe and Mail article to make my decision. I recommend reading the article but, simply put, I personally think the decision will generally break down to the following:

Comparing the Features of Investment Accounts without advisers (As of Nov. 12th)

investment-accounts-comparison-more-2
investment-accounts-comparison-more-2
  • The commission fee structure and inactivity fees of the account

You have to see which commission structure and inactivity fee policy fits your situation.

For example, Virtual Brokers have commission-free accounts for people who can deposit $5000. You can purchase stocks without any commission and there is no inactivity fee either as long as you keep the $5,000 cash or investment in the account. Also, there is no inactivity fee if you are 26 years old or younger.

RBC's direct investing has a $9.95 flat fee per transaction but $25 inactivity fee per quarter for accounts lower than $15,000 investment. When comparing with Virtual Brokers, the deal seems a lot worse if you have more than $5000 but less than $15,000.

You have to understand what kind of fees structure account offer you and see if it fits your financial situation or investment purposes.

  • What kind of investment do you want to purchase?

For example, Virtual Brokers would let you purchase Canadian and US stocks. There is also another discounted online broker, Interactive Brokers, which offers more diverse products including stocks from others countries, Forex, CFDs, etc. I'm not sure what banks can offer but it is always good to look into what products they can offer.

Considering those two above points, you need to choose your investment account. I personally chose Virtual Brokers for Canadian stocks, Interactive Brokers for global stocks and Forex since they offered the cheapest commission. Also, I didn't have to worry about the inactivity fees with Virtual Brokers since I keep at least $5000 of investment at all times.

  1. Open the account

It normally takes about 1-2 weeks to open an account. If you want to buy stocks/bonds for a specific event (e.g. the U.S. election), you should open the accounts well in advance.

Once you add money into the account, you are ready to invest! Keep reading my blog posts and you will become a better investor as well :)

Please leave a comment below if you have any questions! I'd be more than happy to answer them.

Virtual Brokers Cash Referral Program (if interested)

It seems that Virtual Brokers re-launched its Cash Referral Program!! Last time the program was only available for some limited time. Please contact me if you are interested in the program :)

virtual-brokers-referral-program-nov-12
virtual-brokers-referral-program-nov-12

(Retrieved from here on November 12th, 2016)

Disclaimer: For each referral, I receive $25 cash from Virtual Brokers. This promotion is most likely to be available only for a limited time. I do not receive any incentives introducing RBC direct investing, Interactive Brokers, Questrade and Qtrade. I personally use Virtual Brokers and Interactive Brokers and I sincerely recommend them as of now (as of November 12, 2016). All the information on commissions and inactivity fees are subject to change so please check their website to see the latest information before opening an account.