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Self-Directed Brokerage Screen

How To Execute a Stock or ETF Trade

This guide will help you execute a trade through your self-directed brokerage account. 

This walkthrough will show specific screens from the current Questrade platform, but the steps are relevant for any self-directed brokerage account that you may have.  For additional visual help, Questrade has a video showing how to execute a trade.

  1. Open and Fund your account.

We have prepared a guide on how to open a self-directed brokerage account.

  1. Log in to your account and select the account that you want to make the trade from (i.e. TFSA/RRSP/Non-Registered)

  1. Access the Trading Screen

To do so, you can either select the ‘Trading’ icon from the drop-down menu from the top-left of the screen, or you can click the ‘Trade’ button in the top right.

Questrade Account Screen

 

  1. Determine the amount that you can invest on the trading screen

When you reach the trading screen, you can see your current balances in the account:

      • Cash
        • The amount you are currently holding in settled Cash in this account.
      • Market Value
        • The current market value of your investments in this account.
      • Buying Power
        • This is the maximum amount that you are able to invest on your next trade.
        • This amount will be reduced by any buy trade that you execute.
        • See below FAQs for an explanation around buying power vs. cash
  1. Lookup the security that you want to trade

In the top right corner of the screen, look up the security that you want to trade by entering either the symbol or the proper name, and select it from the drop-down that appears.  In the example above, we have looked up XIU, which is the symbol for the iShares TSX 60 ETF.  This security is traded on the Toronto Stock Exchange (TSX), which is why the symbol includes the trailing ‘.TO’ in the name shown in the drop-down menu.

Questrade ETF Lookup

  1. Enter your trade details

NOTE: ONLY PLACE TRADES DURING MARKET HOURS.

After hours trading is risky and is not recommended.  For reference, the TSX is open from 9:30 – 4:30 EST.

On the order entry screen, you are given the current quote information for the security.

NOTE: Quote information is usually delayed by 15 minutes.

Questrade ETF Order Entry

      • Last Price
        • The price paid on the last trade for this security
      • Bid Price
        • The current price being offered on open buy orders
      • Ask Price
        • The current selling price being requested on open sell orders
      • Bid Size
        • The # of units of the current bid order
      • Ask Size
        • The # of units being offered at the current ask price

When buying an ETF, we recommend that you offer as close to the ask price as possible.  When selling, offer as close to the bid price as possible.  If you are trading index ETFs, the spread between the bid and ask will generally be nominal.

In this example, we placed a limit price of $22.37 per unit, which was $0.01 higher than the bid price.  Across the 100 units that were being bought, this was $1 total more than the current ask price for this ETF.  This is a nominal amount to ensure that you should be able to have your trade filled.  If you were to offer only at the bid price, your trade may not be able to be filled by the broker.

Once you determine the price to be offered, you will enter the parameters of your trade and Click “Buy” or Sell”

      • Quantity
        • The number of units/shares to purchase or sell
      • Order Type
        • Only ever execute Limit trades
        • This dictates a maximum price for a buy order and a minimum price for a sell order.
      • Price
        • The price that you are willing to pay for the security (close to Ask on Buy, close to Bid on Sell).
        • Ensure the bid and ask price are close together.
      • Duration
        • How long you want the trade to be open for.
        • As prices are dynamic, there may not be a buyer or seller at the price that you enter at the exact moment that you make your trade.
        • As such, the trade will stay open for the duration you indicate
        • Only execute trades that are open for the Day duration
  1. Confirm that the details of the trade are accurate

A splash screen will appear for you to confirm the details of your trade.  You will see the total trade cost and your updated buying power.  If the details are accurate, click ‘Send Order’.

Questrade ETF Buy Confirmation

  1. Check the status of your order

You will be shown a pop-up with the order details.

In the screen below you see the status as ‘Executed’.  This means that the trade has been filled.  It was filled at $22.36 per unit (the Fill Price), which was less than the limit price we submitted at $22.37.

Questrade ETF Order Details

If the status is showing as ‘OPEN’, then your trade has not been filled.

If the unit price moves higher than your limit price on a buy order, then you may have to raise your limit price by modifying your order.  The opposite is true on a sale, where if the price moves lower you may have to lower your asking price to have your trade fulfilled

After you close the Order Details pop-up, you will be returned to the Trading screen.  Go to the Orders screen by clicking on ‘ORDERS’ in the upper left menu on the Trading screen.

Questrade Order Menu

 

On the Orders screen, you will see the order that you just placed.

Questrade Orders Screen

Select the trade and adjust the limit price if the bid/ask price moves after you have placed your order.

Once the trade has been filled – you are done!

Congratulations!  Understanding how to make a trade puts you in a position to take control of your finances and manage your own investments.

Trading FAQ

Trading (3)

After you place a trade, the transaction is in what is known as the settlement period.  What this means is that there is a period where the brokerage works to move the securities and cash between the accounts of those parties involved in the trade (i.e. cash out, stock in or vice versa).

The day that you execute the trade, to either buy or sell, is the trade date.  The settlement date is typically trade date + 3 days (i.e. T+3).  Your buying power is measured on a trade date basis, where your cash balance is on a settlement basis.  If you execute no other trades, your cash and buying power will be equal after the trade has settled.

This is an instruction to the brokerage.  When you place a market order, the broker will make the trade at any price that the market will bear.  When you place a limit order, they can not go above (on a buy order) or below (on a sell order) the price that you provide.

Your hope is to place orders that are fulfilled very quickly.  A lot can change from day-to-day in the market, and leaving trades open longer than a day is not recommended.  Other duration options are:

  • GTD – Good-Till-Date
    • Expiry date specified by the user, but cannot be open longer than 90 days
  • GTC – Good-Till-Cancelled
    • Expires only if cancelled by the user, or 90 days, whichever is sooner.
  • GTEM – Good-Till-Extended Market
    • This means that the trade will be active in extended trading (until 5:30 pm for Canada exchanges), which is not recommended due to added risk.
  • FOK – Fill or Kill
    • This is a trade that is executed immediately and completely or not at all. This trade type is useful for active traders who trade large volumes of securities.
  • IOC – Immediate or Cancel
    • Similar to FOK, the trade must be executed immediately, but the IOC trade will allow for a partial # of the securities of the order to be fulfilled.  FOK is all or nothing.

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Account Opening Form

How To Open a Self-Directed Brokerage Account

Opening a self-directed brokerage account is an essential step toward taking control of your finances.  This forms an integral component of the Execution phase of the Fee-Only Financial Planning Process.  A self-directed brokerage account allows you to buy and sell stocks, ETFs and other securities.

In order to open an account, you will need some information accessible before you begin, as it will be required as part of the process:

  • Government-issued Photo ID
    • Driver’s License or Passport
  • Current account information if you will be transferring funds into your new account
    • Account #s for each account (RRSP, TFSA, etc.)
    • Institution name and address

The below walkthrough is specifically for our recommended brokerage Questrade, but the steps will be similar for any self-directed brokerage.  This process should take you about 30 minutes to complete but can be done in phases.

Note: We only recommend that you open an account if you will be transferring $5,000 or more.  When you have $5,000 or more, you will not be charged fees for inactivity in your accounts.

Self-Directed Brokerage Account Opening Steps:

  1. Go to questrade.com

  2. Click on “Open An Account” in the top right portion of the landing page

  3. Select the accounts that you wish to open.

Our recommendation is to open an Individual Margin, RRSP, and TFSA account.  These are the 3 basic account types that are appropriate for all Canadians.

Select the Self-Directed account options, not the Questwealth options. Questwealth accounts charge management fees for pre-packaged portfolios.  We have covered elsewhere how management fees negatively impact your portfolio

Questrade Account Opening Selection Screen

On the right-hand side of the screen, you will have the opportunity to enter an offer code.

If you enter the code “uajekubi” you will receive a $50 trade commission rebate.  This is offered as part of the Questrade affiliate program. To understand more, please read our affiliate policy.

  1. Create a user ID and enter your basic personal information

The name that you enter on this screen must match the government issued photo id that you will upload as part of the account opening process.

  1. Build Your Profile

Next, you will expand on the personal information provided in the previous step.

The questions that you answer in the next steps are standard procedure when opening an account with a financial institution.  These questions help to prevent money laundering and sanctions avoidance.  This is a good thing.  You can refer to the Questrade Privacy Policy if you have any questions or concerns.

You will have to enter information in 4 different categories:

      • Personal Information
      • Employment Information
      • Financial Information
      • Citizenship Information

Questrade Build Your Profile Screen

  1. Account Opening Questions and Documents.

For this next step, you have to complete some paperwork and answer questions for each account that you are opening.

From the account summary screen, click on an account to complete the setup.

Questrade Account Setup Selection Screen

There are a separate set of questions for each account, as well as paperwork that must be signed and submitted prior to being able to open your account.  It is during this step where you must upload the copy of your photo-id to the website.

Questrade Account Questions and Documents

  1. Fund your account

Now it’s time to put some of that hard-earned money of yours into your new account.

You have a few options at your disposal.

Questrade Account Funding Options

If you are transferring an RRSP or TFSA to your new accounts, you must use the ‘Transfer account to Questrade’ option.  Any other form of funding would result in a contribution to your account, which may put you over your contribution limits for either your RRSP or TFSA.

When transferring accounts, they can only be transferred into the same type of account (i.e. RRSP into an RRSP).

For a limited time, if you are transferring an account of $25,000 or more, you may be eligible to have your transfer fees that are charged by your current institution (the transfer out) covered up to $150 by Questrade.

If you are transferring your account, you will have 3 options available to you. 

      • Transfer in-kind
      • Transfer in cash
      • Partial

Transferring in cash means that your stock/ETF positions will be liquidated by your current institution and converted to cash.  This can have some unintended consequences, such as incurring brokerage trade commissions, or tax bills for realized gains (or losses) in your non-registered accounts.

Transferring in-kind means that you are moving your stocks and ETFs over while keeping your adjusted cost base/book values intact for tax purposes.  This is the recommended option.

A partial transfer would be for only a portion of your account, as opposed to the full value.  A cash transfer is appropriate if you are holding securities, such as mutual funds, which are unable to be held in your brokerage account.

Account transfers can take up to a month or more, depending on the financial institution.

Minimum initial funding in order to buy stocks or ETFs is $1,000 per account.

 

And that’s it!

Once your accounts are funded, you are now able to trade stocks, ETFs and other securities.

We have prepared a guide on how to execute a stock or ETF trade  for your reference.

Was this guide helpful?  Are there other guides that you would find useful? Let us know in the comments.


TAX underlined on a bankbook

You Can File Your Own Taxes!

Andy Williams said it best, “It’s the most wonderful time of the year!”

Okay, maybe not.

Taxes can be scary. 

Uncomfortable for some.  Frightening for many.

Tax preparers have been making a lucrative living off of the general public for decades.  Similar to the average asset manager or financial advisor, they profit from your fear.  But you really shouldn’t be afraid.  Tax filing for most people and families is very straightforward.  In many cases, filing on your own consists of a very minimal number of steps.  Below I will outline the key things you should be doing and checking off your list to file your own taxes. 

PLEASE NOTE:  This should not be considered a complete guide for personal tax filing and is merely provided to assist with filing your own taxes.  Should you have a more complex tax situation or simply need assistance with filing your taxes, consult a tax professional.

Planning

I know, I get it.

Planning is the step that we typically like to do the least.  It’s the same reason that we don’t check the directions to our destination before we jump in the car and plug it into our GPS or Google Maps or Waze.  Societally, we are being trained to do things on demand.  However, planning is the single most important part of your tax filing.

Since 2018 has come to a close, the majority of the opportunities available for strategic planning have come and gone.  However, as you work through the process for the 2018 filing, this should be able to give you a sense of the opportunities available to you for the 2019 tax year.

In general, if you have any simple questions, the CRA website is a great resource and is generally well laid out and makes things easy to find.  When in doubt, the search function should get you to the information that you are looking for.  The site typically includes many simple examples laid out for a layperson to understand.

An excellent idea to aid in your tax planning and preparation is to enroll in the CRA e-service My Account for Individuals.  This tool gives you access to your notices of assessment, previous tax returns, RRSP/TFSA contribution room balances, as well as managing your personal information, such as direct deposit information and mailing address.

In addition to planning for your tax preparation, tax-planning is a critical component of the Novel Financial Fee-Only Financial Planning Process.  Our mantra is that every taxpayer should pay every single dollar of tax that they owe, but we want to help make sure that you don’t have to pay $1 more than is absolutely necessary through a well devised Fee-Only Financial Plan.

Document Collection

The most important part of a tax filing may not be the filing that you are thinking of.  Having a good document filing system makes the tax process exponentially easier.  Gathering your documents is a task that is best done throughout the year, and not right at the end.  Find a safe place for you to gather these documents together and make a habit of regularly storing them there.

Given that most of what we do is online today, many of these will be digital files.  Create a folder in your email, create a cloud storage account (such as Dropbox, iCloud Drive or Google Drive, OneDrive, Box, etc.), attach a USB drive to your key-chain or use your computer hard drive (with proper backups for physical storage!).  Novel recommends using a cloud drive, as it ensures that the most up-to-date security practices are used, and that you do not need to worry about backups/losing your data.  An excellent review of available cloud drive options is available here.  We also recommend that if you do receive hard-copy documents, take a picture and store it digitally.  At the end of the day, find a method that works for you and ensure that you stick to your document storage plan.

Try to store your documents in folders that are grouped based on document type to make things easier come tax time.

Examples of items to gather throughout the year, and that you should group separately:

  • Medical expenses
  • Union or professional dues
  • Charitable donations (official receipts)
  • Childcare costs
  • Moving expenses, if you moved for a new job or for education
  • Licensing examination fees (i.e. Tradesperson or Professional exams)
  • Support payment documentation (i.e. spousal support)

Items to gather at year-end:

NOTE: Not all of the above items listed will be relevant for your situation.

The CRA website offers a full list of deduction and credit opportunities.

Use Tax Software

Save some trees.  The option to paper file is available, but effectively no one does so.

If you haven’t tried using some of the various software out there, you may be surprised at just how easy they are to use.  There are many offerings available, and pricing varies by your needs.  In fact, some options offer a “pay as much as you’d like” option or offer free return filing for simple tax returns.

Here is a full list of NETFILE certified software options.  

As well, here is a review of some of the more prominent tax filing options available.

Tax Filing Time

Now that you are feeling comfortable to tackle the not-so-scary beast that is filing your own taxes, here is a helpful checklist to follow throughout your process.

  • Enroll in a CRA My Account for Individuals
  • Choose a NETFILE certified software provider
  • Start by taking the interview in the tax software or use the search function to find the document types that you have collected.
    • This may also help you identify what
  • Ensure that all of your T slips get entered somewhere in the software
  • Address all of your deduction and credit opportunities available to you
    • A good rule of thumb is that if you have a document saved, ask yourself, how did you use this on your tax return?
  • Be strategic with your RRSPs
    • Ensure that for your 2018 taxes, you have included the Mar – Dec 2018 and the Jan-Feb 2019 RRSP slips
    • Determine if you want to deduct in the current year or defer to 2019. You should potentially consider a deferral if your 2019 income will be much greater than in 2018, or will be in a higher tax bracket.
    • The software packages tend to focus on maximizing your refund in the current year, which may not be appropriate for your situation.
  • Review the errors and warnings in the software
    • The software out there typically provides warnings or suggestions at the end of the process. Determine if these apply to your situation and amend as required.
  • Ask for help
    • The average tax software has either a help or forum function available to help you through the process.
    • Some can even connect you with professional tax preparers to have your questions answered.
  • File your return using NETFILE, via the software that you have chosen
  • Save a copy of your NETFILE confirmation
  • Save a copy of your electronic tax return from the software
    • Select the option for the T1 and all supporting schedules, etc.
  • If provided with a Notice of Assessment at time of filing, save a copy as well
    • This will be your first official 2019 tax planning document!
    • This will also be available via CRA My Account once your return is processed, if not available immediately via the software.

And… ta-dah! You have officially filed your own taxes.  Was it truly that daunting?  I believe that you will have found that filing your own taxes isn’t as difficult as you might have thought.  Another benefit of doing this for yourself is that you now understand the process and typical items that could be potential tax planning/saving opportunities.  Novel would be happy to discuss potential tax planning opportunities for 2019 with you as part of your Fee-Only Financial Plan.  Contact us to discuss tax planning strategies as well as to discuss how to best utilize your tax refund!

Conversely, if you are still uncomfortable filing on your own or have questions, Novel can support you through the planning process and will refer you to qualified tax preparers.

Questions, comments, anything to add?  Please reply in the comments section.  We would love to hear from you.


Investment Trader Terminal

The Case Against Active Portfolio Management

 

Being active is for the gym, not your portfolio.

“When did you get so clever?”
“When I realized I wasn’t as clever as I thought.” 
― John Connolly, The Infernals

Hubris.  The fatal flaw.  And a common trait of the average actively managed fund manager.

“I will be different!” … is what I envision them saying, as they march onward in the quest for alpha.

Each and every day, throngs of asset management employees spend hours poring over reams of data, performing endless analysis and searching for the golden nugget of information that will give them an edge over their competition.  And unfortunately, each and every day, the majority fail.

They fail.

Day after day.

Month after month.

Year after year.

This isn’t up for debate, it has been empirically proven.

The investment management industry attempts to sell you on their superior expertise to maximize your investment gains. 

We have all seen ads similar to this one:

Advertisement from investment firm that claims outperformance

However, they are really spending a lot of money on marketing in vain.

There are 2 factors to consider with respect to their performance.

INVESTMENT RETURNS

The most critical aspect of measuring a mutual fund’s returns is their performance against its benchmark

For example, if you wanted to buy a mutual fund that invested in Canadian stocks, that mutual fund would likely be benchmarked against the S&P/TSX Composite Index.  The actively managed mutual fund would then invest in an attempt to outperform that index.  It would do this in 2 primary ways:

  • Only investing in certain stocks while avoiding others, some examples may include

    • investing in banks but not oil & gas;
    • investing specific bank stocks instead of all bank stocks
  • Timing the market by investing more or less in an attempt to avoid losses and capitalize on upward momentum gains.

There are other ways that certain funds may be able to achieve gains (e.g. options, hedging, etc.), but not all are appropriate for the average mutual fund.

SPIVA scorecards track the performance of mutual funds against their respective benchmarks.  Below is a summary of some of their most recent findings.

Summary table which shows that the vast majority of mutual funds don't beat their benchmark index

Simply put another way, the best performing sample only saw 37% of mutual funds beat their index.

Funds are often judged based on quartiles.  This means that for a given class of funds, such as US Large Cap funds, they are measured against their competition in the group via a ranking from top to bottom.  The top-performing 25% of funds would be in the top quartile and the bottom 25% in the bottom.  Because they are grouped together in this manner, many fund managers aim to simply not be an outlier amongst their peers.  Why do you ask? How do you think a fund manager’s year-end performance review with their boss would be if they were in the bottom quartile for a given year?

This is what gives rise to the concept of closet indexers.  What this means is that supposedly actively managed funds are in fact aiming to mimic their respective benchmark so that they can avoid appearing in the bottom quartile of their group.  This is relatively easy to do by investing in the entire, or close to it, benchmark.  For example:  If the TSX was made up of 1/3 Financials, 1/3 Oil & Gas and 1/3 Mining companies, the active manager could invest in 2 or 3 companies for each segment of equal weights. 1/3 of the assets invested each of Financials, Oil & Gas and Mining, and you have likely just avoided the bottom quartile.  This would not yield outperformance but would rather perform similarly to that of the entire TSX (in this simplified example).

INVESTMENT EXPENSES

The other key consideration with active management is expenses.  Active management costs more.  It costs more in a few ways:

  • Higher Management Fees or MERs for mutual funds
  • Higher trading costs due to trading in and out of stocks.
  • Tax bills for realized gains

The cost argument is always best approached by comparison.  If you simply bought an index fund that tracked the TSX, you would pay less in management fees than an actively managed fund.  For example, TD offers many mutual funds, but I have included an example below of their cheapest TSX Index Fund and an actively managed fund which intends to outperform the TSX.  Below is a summary of their MERs and relative performance (data source 1 and 2).

Comparison of TD Mutual Funds

To be clear, TD is used in this example, but this is something that you would likely find at nearly any mutual fund vendor with respect to expenses on the actively managed side. That said, the e-series offering from TD is one of the lowest cost options of its kind.

Now, consider how many of these actively managed funds may be closet indexers in conjunction with the higher prices that they charge for management…  That sounds like a recipe for underperformance, not their promise of outperformance.

If you choose to invest with a portfolio manager who would be purchasing individual stocks, instead of a mutual fund, this is where the trade costs add up.  Every time that the asset manager switches into and out of a stock, they have to pay a commission to the brokerage that houses your account.  This means, that through being active in an attempt to outperform, there can be substantial fees related to stock trading.

The additional contemplation of active stock trading is taxes.  Every time that you trade a stock in a non-registered account (i.e. outside of a TFSA or RRSP) you realize a gain or loss.  This could mean that you are stuck with a surprise tax bill at year end because of all the active trading that you are doing.  This means that the money owing in taxes cannot be reinvested and compounded for your benefit, but instead will be sent to our good friends in Ottawa.

If you go back and look at the advertisement shown above, you will note that it doesn’t indicate whether the returns are before or after fees.  How do you think the return figures might change if you factored in 1, 3, 5 or more years of fees into the equation?

 

THE BRASS TACKS

Asset managers would like to sell you on their superior intellect and clever ability to pick individual stocks that are winners.  History has told us otherwise.  Index investing guarantees you the effective market return at a lower cost.

Think of it this way:

You are writing an exam and have 2 potential study methods.

Study Plan A gives you a 20% chance of being average or better and an 80% chance of being below average and the material will cost $600.

Study Plan B gives you a 100% chance of being average and costs $100.

Study Plan B would be a no-brainer.

So I will leave you with one final question:

Who’s clever now?