Many discount brokerages offer different account types, but among the most recognizable are registered retirement savings plans accounts (RRSPs), registered educations savings plans (RESPs) and recently, the tax-free savings accounts (TFSAs). Discount brokerages also offer what are often known as “non-registered” accounts (as opposed to the registered accounts listed above) which usually consist of either “cash” or “margin” accounts.
Will you be paying by cash or credit?
A “cash” account is one in which a client can only purchase or sell securities if they have that dollar amount available in their account. Most if not all registered accounts are considered “cash accounts” meaning you can only purchase as much of a security as you have money to purchase with. Registered accounts also have more restrictions on what kinds of products you can have inside of them as well as on what types of trades you are allowed to place. For example, most discount brokerages will not let you short sell a stock (or write options) inside of a registered account.
“Margin” accounts, on the other hand, allow clients to borrow money from their discount broker in order to trade securities. One convenient way to think of the difference between cash and margin accounts is that “cash” accounts are like your regular bank account – you can only spend what you have available in that account, whereas “margin” accounts are like having a line of credit or overdraft, where you can buy securities with borrowed money but in exchange for borrowing the money you have to pay interest to your broker until the amount borrowed is paid back.
Using margin is a form of “leverage” – a term that many people are more familiar with because of the recent financial crisis. The term itself implies that you can, just like a physical lever, amplify the force of your trading dollar. So, for example, for every $1 dollar you actually have, you can borrow anywhere from $3 to $50 depending on what the brokerage is willing to lend. With a margin account, it is possible to get into a situation where you owe the broker more than the cash you have on hand (just like overspending on your credit card), so for that reason margin accounts are to be treated with caution and are usually for more experienced investors.
Do you know what you’re looking for?
When trying to choose a discount broker, one of the first things you’ll want to do is determine what account type you are interested in opening – a registered account or a non-registered account or both. Not all discount brokerages in Canada offer registered accounts, so you can narrow down your search by excluding certain brokerages from consideration. We have actually helped identify which discount brokers do and don’t have registered accounts on our discount brokerage comparison page here.
If you are looking for an account to invest with outside of your TFSAs or RRSPs, you can look into either a cash account or margin account. If you are looking to do the most basic of investing/trading – just plain old buying and selling, a cash account is adequate. On the other hand, if you are looking to short sell stocks or use options trading, you will likely need to have a margin account (if you don’t know what short selling is, you can learn a bit about it here). Some discount brokerages only offer margin accounts outside of their registered plans so be aware that if you are being offered a margin account, you should keep track of how much you are purchasing. Similar to the overdraft, just because you are offered the margin, does not mean you are obliged to use it, but you should definitely use it wisely.