Brokers and TFSAs

Investing is all cool, but unfortunately it is not something that you can do on your own very easily. Specifically, to invest in the stock market, you will need a broker. In essence, a broker is a company or a person that takes charge of the transaction on the stock market for you. Because you are not a member of a certain exchange, you cannot trade on that exchange. In this blog post, we will go over three popular brokers in Canada: QTrade, Questrade and Wealthsimple. Moreover, we will get into the details of how you can open your first savings account and start saving money!

QTrade

The main advantage of QTrade over its competitors is that mutual funds are free to trade with their services. Otherwise, it is overall more costly than our two other benchmarks. For instance, you will get charged money for trading stocks and ETFs (don’t get me wrong this is actually common practice, some products are just cheaper than QTrade). They also charge quarterly fees (four times per year) of $25 on accounts less than $25,000. They are, however, reputed to have the best customer service around. And if you are under 30, you can qualify to be a “Young Investor” and get discounts on stocks trading and no admin fees. All you have to do is to setup monthly preauthorized contributions.

Questrade

Upfront, Questrade is cheaper than QTrade. They charge no fees on ETFs, but they charge stock and mutual funds transaction fees. Moreover, they don’t charge annual fees on self-directed RRSP (retirement plans) and TFSA (savings accounts). The customer service is solid and the website intuitive.

Wealthsimple

The biggest advantage of Wealthsimple is the fact that ETFs AND stocks are free to buy, meaning that you are not charged transactions fees. Interestingly, you can also open a cash account where you can easily deposit and withdraw money, just like a regular bank account.

Common Traits

I mention common traits here mostly to avoid repetitions, but these are features that most brokers possess. How do you think Wealthsimple makes money if they don’t charge you on stocks trades? They, just like the two other brokers, offer portfolio management services. This means that you pay a percentage of your portfolio (like 0.5%) to the company to pick stocks and ETFs for you. This is great if you really don’t want to know anything about investing yet still reap the benefits, but can be costly in the long term. If you just put $10,000 in a account and let it sit at 6% for 20 years, it will be worth $32,071. On the other hand, just a 0.5% less return on investment will return you $29,177, which is about $3000 less. There is no better choice, just something to keep in mind. Moreover, studies repeatedly show that actively managed portfolios tend not to perform better than index fund investing (but this is for a next article!)

Which one to choose?

As with many things in finances, the answer is “it depends.” If you want to trade mutual funds, QTrade might be the way to go. If you want to trade ETFs for cheap, then Questrade and Wealthsimple might be your best picks. For active stock traders, Wealthsimple can definitely be an interesting option.

Opening a TFSA

TFSA is a bit of a word of gospel in finances. It stands for “Tax Free Savings Account.” Not super exciting hey? However, there is a good reason why it is such a buzzword in finances. As the name implies, what you put in it remains tax-free when you withdraw, meaning that you don’t pay taxes on it like regular income. However, there is a limit to the amount of money you can put in it. This is especially more confusing, because the amount you can deposit varies each year and is calculated from the day you turn 18. So, each year after you turn 18 (including the one of your first adult birthday), you can deposit a certain amount. If you exceed the amount, you will get some penalties.

What is interesting is that the amounts of money you can put each year accumulate over time, even if you have no TFSA open. For example, someone who is 25 and opens a TFSA at this age would have 7 years worth of “room” accumulated to put in the TFSA. If you open it right on your 18th birthday, you can “only” deposit the maximum for the year, which was about $6000 for the last years.

Now, to open a TFSA, you will need a broker, hence the importance of the discussion we had earlier. Usually, you can choose the type of account you want when you register (or add an account if you are already registered with a broker). You can open multiple TFSAs, but the total limit is the same each year (you could not deposit $6000 in each of them, but you could deposit $2000 in 3 different accounts). Brokers ask you to provide a piece of identity, your Social Insurance Number (hence the importance of choosing a reputed broker!) and some information. Once you are set up, you can deposit money! It usually takes a few days for the broker to process your demand before you can access your account.

What’s next?

With the TFSA, you can invest money in stocks, bonds and ETFs. We will cover different strategies very soon! For the moment, simply creating a TFSA is a good start and will lay the groundwork of our future endeavours down the dirty corners of Wall Street.

Until next time, folks!
Louis-Philippe Robichaud