What is an online brokerage?

If I’ve said it once, I’ve said it a million times — the internet has revolutionized the way we do everything. From meeting with friends to collaborating on work or school projects, the internet is in and around everything we do. Banking is obviously no different. You likely work with your bank via a smartphone app, website, or even on social media.

Another huge part of finance, in addition to your bank account at your depository institution, is investing. Here’s yet another example of a business that used to be relegated to a few elite and wealthy individuals. The internet has revolutionized how ordinary folks can quickly invest as much or as little money as they like right from their phone or computer. When you invest in this way, you are doing so through an online brokerage. Here, we’ll take a look at what an online brokerage is, the different kinds, and a few of the pros and cons to keep an eye out for.

What is an online brokerage?

Simply put, an online brokerage is a company that offers access to invest money in the stock market right on the internet, either through an app, a website, or both. Online brokerages come in a bunch of different shapes and sizes, from simple standalone apps that invest a few dollars here and there to full-fledged managed investment accounts with fund managers. The setup of an online brokerage and if and how often investment advisors manage your funds change the fees you’ll have to pay to use the service.

Many online brokerages have brick-and-mortar locations, while some are digital-only. Online brokerage accounts are also generally taxable accounts. Registered Retirement Savings Plan (RRSP) accounts can be managed through online brokerages. However, what we’re dealing with here are non-retirement accounts that are taxable according to Canadian law.

Wait...taxes? Tell me about it.

Sure thing. Remember that you’ll have to pay capital gains tax on any increase in the value of your investments. Let’s take an example; say you purchase an investment and it gains value over a few months, then you sell. You’ll have to pay capital gains tax on the increased value. Let’s say you purchase a stock for $100 on January 1 and on March 1, sell it for $1,000. First of all, congratulations. Second, prepare to pay capital gains taxes on that $900, which is considered investment income. The capital gains tax rate in Canada is 50%.

Got it… So what about online brokerages?

Right, back to our program.

One of the hallmarks of an online brokerage account is that you have the ability to manage many of the investments yourself or with the help of an algorithm. There are lots of apps out there in which you can deposit money and purchase investments of all sorts.

The totally DIY, app-based approach

Apps like Robinhood, Acorns, and Wealthsimple all take novel approaches to investing. Robinhood, for example, allows you to buy into curated groups of stocks and bonds. Let’s say you’re interested in companies that are promoting renewable energy. Robinhood and many other online brokerage apps will allow you to buy into a preset group of companies that focus on renewables. Acorns, on the other hand, focuses on micro-investing by rounding up your purchases to a whole dollar and investing that change.

The big pro for these apps is that they tend to have much lower fees. However, those low fees mean these apps don’t have a number of investment advisors on staff to help you make smart decisions. You’re totally on your own here. As long as you’re okay with developing your investment strategy sans advice from professionals, you’re fine.

The middle-of-the-road

If you’re a bit more serious about your investing but still want to stick with the DIY approach, all of the major investment houses have apps and websites that allow you to deposit money and manage your investments, including TD, Goldman Sachs, and more. Here, you’ll pay a bit of a higher fee, either monthly or more normally, per trade, but in exchange, you’ll be able to access additional resources like investment advice and direct communication with an individual. These companies also often come along with accompanying chequing and savings accounts that can help offset some of the cost of moving money around.

I want all the help

Maybe you’re just no good with investing or simply don’t have the time. No problem! You can stick with an online brokerage but also work with an investment manager. Here, you’ll deposit money and fill out some questions that help an advisor understand your goals, like investing for a new home or saving additional money for retirement. The manager will then invest and manage your money for you.

You will, of course, pay a fee for this service. This fee can take many different forms, the most common being account maintenance fees and per-transaction fees.

Fees—let’s talk about them

Much of the marketing in the investment app space centres around free trades and limited fees. This seems like a good thing and in many ways it is. But think of a fee for investing in the same way you’d think of paying for a service. When you go to a restaurant and your waiter provides great service, good conversation, and offers menu or wine suggestions, you don’t mind tipping for that knowledge. The same principle applies here — you get what you pay for. As long as you have a firm understanding of the fees and are able to ensure that you’re actually making the most out of that service, it’s worth it.

Why do you need an online brokerage?

You may be saying to yourself, “Hey, I’m a smart investor. Why can’t I just call up the trading desk at my favourite exchange and buy some stocks?!” No one is denying you’re a smart investor but the fact is, stock markets can’t have a couple hundred million Canadians ringing them up to sell their $10 position in their favourite soda maker. Brokerages are the necessary mediators; they help to organize trades for the markets and create uniform pathways for their clients, and the clients of other brokerages to buy and sell investments. They, of course, get their taste for arranging it but at the end of the day, if you’re a smart investor, you’ll be able to cover their fee nicely.

Things to keep in mind

There are few things you need to keep in mind as you select an online brokerage and build some additional investment into your portfolio.

Have a budget

It goes without saying: make sure you understand how much income you have coming in and the bills you have to pay each month before you begin investing money, which you can do using a simple budgeting template. You need to ensure you have plenty of money to spare. You should also already have an emergency fund as well before you begin investing.

Make sure you’re contributing to retirement

The investments we’re dealing with here do not include your retirement account. It’s important, however, to begin contributing to your retirement account as early as possible, and before you open a separate brokerage account. The more money you have in your RRSP as early as possible, the better off your financial position will be. Ideally, you should be maxing out your RRSP contributions each year. At a minimum, however, you should be contributing enough to take advantage of any matching program your employer offers.

Have a firm understanding of fees and costs

Nothing in life is free and online brokerages are no different. Whether you’re using a barebones app or a full-fledged investment manager, you’ll have to pay a fee of some kind. Make sure you understand when you’ll be paying and how that money will be deducted. Is it a percentage of your portfolio? A flat fee? A complete understanding will allow you to invest smartly.

Don’t be afraid to ask questions

Online brokerages are designed, in many ways, to be managed on your own. However, even the simplest of apps have a helpline. If you don’t understand how the products work, don’t be afraid to reach out.

The benefit of online brokerages

Online brokerages have levelled the playing field, making easy investment options available to everyone, regardless of location and initial investment. Understanding how online brokerages work, the type of brokerage relationship you need, and how the fee structure works will help you keep your investments headed in the right direction.