Navigating the World of Investment Accounts with Ease

What is an investment account and how can it help you save for the future?

An investment account is an online platform that links you to the stock markets, usually through a bank or similar financial institution. Your bank accounts will be linked to the investment account.

Setting up the account requires enrolling with a financial institution, followed by a meeting, and signing of documents. When approved, the account allows you to place buy and sell orders for securities offered on the stock market.

The account allows you to manage your investments independently and you’ll no longer need a stockbroker, financial advisor, or money manager to oversee you investments.

Typically you will have registered accounts (RRSP, TFSA, RESP, etc.) which are administered by the government, as well as non-registered accounts.

How does the account work?

You begin the process by transferring money from your bank account (chequing/savings) to your investment account. Once the money is in your investment account, you purchase shares of the security you want to own.

Your financial institution will charge a fee to buy or sell shares which will be automatically deducted from the transaction (typically about $6.95 per trade CIBC to $9.99 per trade TD). The account value is updated each day to reflect the previous day’s closing price per share.

Dividend Payments and Automatic Reinvestments.

Many investments pay out a dividend which I can look forward to receiving on a monthly basis (some pay quarterly, others semi-annually or annually).

Dividend Reinvestment Plan

My investment account has strict instructions to automatically reinvest those dividends into buying additional shares of the fund. As a bonus you are not charged a transaction fee when dividends are used to automatically repurchase shares.

Remember idle cash earns no money. When the cash in your account is sufficient to buy a share (plus trading fee) be sure to make the purchase. Collecting dividends and then having them automatically reinvested into buying more shares of your investment is an excellent example of using compound growth.

Summary – It Really Is that Easy.

When you manage you own investments you save on the fees a financial advisor will charge. You can also concentrate on well diversified index funds that have industry leading low management fees of 0.2% (see my post “Financial Funds Explained Briefly” for more information on these funds).

Compare this to an actively managed fund where you would typically pay 2-3% of your total investment as yearly management fees. You can quickly see that a self-directed invested strategy allows you to keep more of your money. Money saved on fees equals more money to compound and grow over time. We can thank the internet for allowing everyone the freedom to manage their own investments in a low cost manner.

Remember that registered funds have government rules you must follow:

RRSP’s have yearly contribution limits (18% of your previous year’s income or the 2023 capped amount of $30,780).

TFSA’s have a yearly contribution limit (2024 currently $7,000).

Most trading platforms will give a warning if your purchase will exceed these limits, but don’t assume that will be the case.

What Are the Risks?

You must exercise caution and use discipline. The trading account is your first step towards financial independence but you must understand the process. What funds offer the most diversification, least risk and lowest fees?

Do I invest in an RRSP or TFSA and what are the benefits of choosing one over the other? Can I handle adversity and hold for the long term. Will I panic and sell at the worst possible time? If you choose to panic and sell after a market crash, you will lock in your losses.

Cautions!

Remember that an investment account is meant for long term retirement saving, it is NOT a day trading account. You will have no one to stop you from making bad decisions and if you choose to speculate, you’ll lose. Nobody can time the market. Short term trading increases costs and inevitably leads to losses.

It is possible to learn just enough to manage your own investments and save the fees an advisor with charge. All that is required is the desire to learn the process and willpower to invest safely and hold for the long term.

In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.