HOW DO I OPEN A BROKERAGE ACCOUNT?

If you’re looking at managing your investments, the first thing you need to do is open a brokerage account. This guide uncovers what you need to know in order to open the best brokerage account for your needs.

Ways to Open Brokerage Accounts

There are two methods to opening brokerage accounts, in person and online, and they have many similarities.

In Person

After selecting the firm or bank you would like to deal with and either choosing an investment advisor or representative, or being assigned one, the paperwork and identification process begins. Due to anti-money laundering laws, identification and bank account information will be required. Often, it is two pieces of government-issued identification and a cheque drawn on a bank account in your name that will be required. If dealing with a personal broker, the firm is a full-service brokerage. However, you can open a discount brokerage account in person, as well.

Online

The online process will vary from firm to firm, but you will be required to send in forms and copies of your identification and a deposit. Often, you will also be required to have had a pre-existing relationship with the firm (i.e. have a chequing account at the bank side of the firm) to further prove your identity. Most online entities are discount brokerage firms.

Things to Consider

Discount vs. Full-Service Brokerages

Online accounts are typically referred to as discount brokers and will charge a lower commission but provide no advice, tax planning or investment expertise. Full-service firms charge a higher commission but match you with an investment professional who can provide advice on a number of topics or refer you to someone who can help with tax and legal issues, as well as provide investment ideas and access to speciality or restricted investment products (e.g. IPO’s, private placements).

Type of Brokerage Accounts

There are a number of types of brokerage accounts that an investor can open to meet various investment goals.

• Cash Account – this is the plain vanilla taxable brokerage account. This account only allows an investor to be long stocks and bonds, and is taxed at the jurisdiction’s legislated rate.
• Margin Account – A margin account allows the investor to borrow money from the investment firm and buy stocks on margin or leverage. This account allows long and short trades in stocks, long bonds and investing, or speculating in options and futures – derivative products.
• Registered Accounts or Tax Free Accounts – These accounts have different names in different countries (RRSP, RESP, TFSA, and LIRA in Canada, and 401k and 529 plans in the US; other countries have other similar accounts but they are referred to by different names). Each country will have slightly different tax rules, but the reasoning and incentives are mostly the same. Accounts such as RRSP or a 401k have the goals of tax deferral. Tax on the money contributed is not owed until the account is wound down, or what is known as ‘deregistered’. The idea is the investor will be in a lower tax bracket during retirement and will therefore pay less tax. This incentive is given to encourage people to save in their earning years. Accounts like the TFSA are populated with after-tax dollars, but the capital gains and investment income is waived. This incentive is to encourage capital accumulation. RESP and 529 plans are tax-deferred and often matched by government (up to a certain percentage), and are designed to help parents save for a child’s post-secondary expenses.

Find more information on various types of investment accounts.