Your “Online Trading Account” is not you doing an actual Trade (buy or sell a stock) by yourself. Actual trades must be done by a “Broker”. Your online trading account is a direct link to your broker’s system. Before computers, you would call your broker and tell him/her what to do. Now you make the decisions, and their computer handles the mechanics of the actual trade. The Brokerage firm has to do the actual trade for you.
There are lots of reasons to choose one brokerage over another. Things like trading fees, research tools, access to company data, news feeds, analysts reports, ability to monitor stocks, etc. Your trading account is much more than just a link to your broker. All the reputable sites come with a host of research tools, and ways to monitor and track your stocks. Do not under estimate the value of the research tools. In order to be successful, research will be your launch pad for all of your decisions. Please watch out for the brokerages that appear on side bars, advertising low trade fees. Be sure you know who you are dealing with. These people are handling YOUR MONEY!
Your trading account can have several sub accounts. Like a TFSA, RRSP (401K), Canadian Dollar, US Dollar, etc. If you are going to invest in US based stocks, I would strongly suggest you have a US dollar account. This can save hassles with exchange rates. Many online accounts have a better exchange rate than your local bank branch. It only takes a few minutes to set up an Online Trading Account, and most have no setup fee. Always check to see what the fees are. RRSP’s need to have paperwork and interface with Revenue Canada. The bank may charge for that service.
When you are a Micro Investor the trading commissions, even the more reasonable ones today, are a major expense. Things have changed a lot since I started investing. When I started in 2004, trade commissions were $29.00 on each end of a trade. On a $500.00 investment is 11.6%. What that means is that the stock has to go up in value 11.6% before you break even. (Commission is charged when you buy the stock and when you sell the stock.) Today, most fees are in the $6-$10 range. This has helped make trading in smaller amounts, and cheaper stocks more profitable. Trading fees are important, but should not be the only factor when deciding which Brokerage Firm to use. In other posts we will talk about how to compensate for the trade fees. The research tools that come with the account are far more valuable than you realize. Having the tools necessary to pick winning stocks is far more valuable than a low trade fee.
Another important feature of your online account is the way that you can monitor the stocks you own, and maybe just as important, the ones you don’t. When you are first starting out, this allows you to “Practice Like its real” so that you understand how your account works. Unfortunately, many practice accounts don’t give you full access to all the tools.
I use TD Waterhouse (www.tdwaterhouse.ca) Toronto Dominion Bank’s online trading system, so my examples are based on their system. In the United States they are called TD Ameritrade. ( www.tdameritrade.com) I have also looked at both the Royal Bank (www.rbcdirectinvesting.com), CIBC (Canadian Imperial Bank of Commerce) (www.Investorsedge.cibc.com), and Scotia Bank ITrade. We are working on videos for each major trading platform to show how to navigate the basics of Research and trading. The hold up is getting the banks to cooperate.
Most of the major trading platforms now have very similar commission rates. (Don’t you love competition?) I like TD Waterhouse because they have excellent research tools, hold free seminars on how to use the platform, and have very knowledgeable people to assist with questions and issues on the phone. They had an excellent feature called “Portfolio manager” that was a fantastic tracking tool. New accounts (since Nov 2016) do not have this feature.
Once your account is set up, you are ready to practice. I strongly suggest that you practice using the tools and the platform for 6 months to 1 year before you ever actually buy a stock. Yes, there is that much to learn. I wish I had back, all the money it cost me to learn. The 6 – 12 months also gives you time to get used to the psychology of investing. It takes quite a while to get used to seeing your account loose $500.00 in a day. Making $500.00 in a day is much easier to deal with.
Setting exit strategies is also a must. For example; if you buy a stock for $1.00 a share. At what price do you sell it if it goes up? What price do you sell at if it goes down? That is what I mean by exit points. I set my exit points at 20% on the way up, and 10% on the way down. In the above example I would look to sell at $1.20 on the way up, and $0.90 on the way down. These can be set in many of the trading platforms to send you an email when these levels are reached. You can also set up your account to automatically sell if the points are reached. I personally recommend the email alert and not the automatic sales.
The only thing that I will add is that many of the practice accounts give you $100,000.00 to play with. That is a real mistake. The type of investing you can do and the type of stocks you can buy with a $100K budget is totally different, that if you have $1000.00 budget. If you want to be successful ONLY USE THE AMOUNT YOU WOULD ACTUALLY HAVE TO INVEST IN REAL LIFE! Also keep track of the fees involved. Developing bad habits while practicing, will cost you real dollars later.