So now that you’ve learned a bit about dividend investing and have seen that it can build wealth over time, it’s time to take the reins of your investment portfolio and become a Do-It yourself investor. I’d say the first step would be choosing the right discount brokerage.
Discount BrokerageA discount broker is a stock broker who executes buy and sell orders for a cheaper commission compared to a full service broker. Full service brokers offer consultations and advice while discount brokers just place the orders for you. Thanks to the wonderful invention of the internet, most discount brokerages are referred to as “online brokerages”. That way it sounds less “cheap” or “trashy” depending on which of those two words insults you more.
Choose wiselyDepending on where you live there can be dozens of online brokerages to choose from. Most banks have an online brokerage but there are some “purely online brokerages” that have no brick buildings to visit. These virtual brokerages usually offer the lowest commissions on trades and can seem like an obvious choice, however, some banks have perks for people who bank and invest with the same institution. I know RBC has a free chequing account when you use a combination of three financial products which includes investment accounts. I personally like being able to meet with someone in person if I have any concerns or questions with my investment accounts. I pay $9.99 per trade, but I can also call at 3am to place trades or set up accounts if I choose to do so. In the end it comes down to what feels right for you.
Types of AccountsOnce you choose the right online broker, you must decide which type of investment accounts you want to use. Since this is a beginner guide I’m going to stick with the three basic accounts that most investors have. They are in no particular order: the cash account, the self-directed RRSP and my personal favourite, the self-directed TFSA.
TFSA Account- For anyone new to investing, I recommend that a self-directed TFSA trading account be your first stop in your investment journey. As long as you hold Canadian stocks, there are no tax implications for any type of gains you make in this account. Any money you withdraw from your self-directed TFSA is considered tax-free and most TFSA accounts have zero fees. Perfect to get your feet wet, just don’t over contribute each year.
While the government would have you use a regular TFSA to save for a vacation or a new car, I’ve learned to turn it into a tax-free income source in my retirement. I started by depositing $10,000 in January 2010 and buying 200 shares of Enbridge. Every year I added another $5000 and purchased more shares of dividend paying stocks until I reached the maximum $20,000 for 2012. At the time of writing this guide, my TFSA is worth over $27,000 and pays out a dividend income of $907 per year. That income will increase each year thanks to dividend increases and future contributions. If I re-invest the dividends each year with the yearly $5000 contributions, I’ll be able to purchase more stock that pays me even more dividends each year. Eventually, my goal is to have a TFSA account that pays me $30,000 a year tax-free. Sure beats saving for a stupid trip!
Cash Account- A cash account is your normal trading account that lets you invest the cash money that you’ve transferred in. Any capital gains or dividends you make are taxable and will have to be paid at tax time. Cash accounts normally don’t have any fees associated with using them.
RRSP Account- This self-directed account lets you invest registered savings without any penalties or taxes as long as no money is withdrawn. You can even hold U.S stocks without being charged the withholding taxes. Taxes will be deducted from your withdrawals when you decide to retire. Most banks charge a $100 fee unless you have $25,000 in assets. You can even transfer your registered mutual funds into this type of account if you need to make the minimum $25,000 amount. I transferred my mutual funds into my registered account and then sold them. Best decision I ever made!
Once you figure out which accounts you want, just call up your discount brokerage to set up the accounts or make an appointment to fill out the necessary paper work. In no time you’ll be on your way to investing on your own terms. I’m living proof that anyone can learn to invest on their own. It just takes a little patience and smart planning to turn your stinker of a portfolio into an income generating machine.
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