Opening a Securities Deposit Account: The First Step Towards Exchange Trading
Lisa is in her late 20’s and has been in her first full-time job for about a year. She now wants to work with her money to make some more. She has, thus, decided to invest on the stock market. However, she is an absolute beginner and does not quite know what to do next. First of all, she needs a securities deposit account.
Nowadays, securities are almost entirely managed electronically: in virtual securities accounts. There are two types of accounts: one with a discount broker and one with a classical bank. The scope of services can vary, which is why you should compare conditions and fees before making a decision.
To become informed, Lisa is looking for a comparison of brokers, such as offered by Börse Online. This overview shows the exchange novice that classical securities accounts held with “house banks“ are more expensive than those held with discount brokers. One of the reasons for this is that the latter often do not offer advisory services. Plus, they usually have no branches, but execute the entire order from receiving to settlement from one single location. These cost savings are forwarded to the customer in the form of lower account fees. While major banks charge up to € 85 per year, some discount brokers even offer free accounts. However, you should always read the small print. Some discount brokers only offer favorable conditions if you trade regularly. Otherwise, additional costs may occur.
When choosing a securities account, the transaction costs play an important role, for they can vary greatly. An example: Citibank charges a fee of nearly € 10 per transaction, independent of the order size. Deutsche Bank, on the other hand, differentiates according to order volume. For € 2,000, a fee of € 20 applies. This fee increases to € 200 when placing an order with a value of € 20,000. When comparing these costs, you should also bear in mind how often you wish to trade, since the (minimum) fee can add up to quite a sum, particularly for smaller order volumes.
So-called partial execution can cause additional costs. Partial execution means that an order is not executed in full but in several parts. This occurs on the electronic trading system if an order placed cannot be matched with an order of a corresponding size. To split the order in parts can be an advantage if the investor achieves a more favorable price for a part of it than he would have in a full execution of the order. However, additional fees may be charged by the bank or broker, even though they themselves do not have additional trading costs. Thus, you should check in advance which brokers charge fees for partial execution.
An example: Lisa buys 100 shares of company A and places a respective order. The trading system matches the order against the available offers and executes as follows: 50 shares at € 9 each and 50 shares at € 10 each. 100 shares at a total price of € 950 are transferred to Lisa’s securities deposit account. Without partial execution, Lisa would have bought 100 shares at € 10 each, which would have resulted in an additional cost of € 50.
As a rule, floor trading in Frankfurt only offers full execution for German standard titles – i.e. DAX, TecDAX and MDAX titles – for orders up to a certain volume. All orders are executed via the order book of the lead brokers. This is why it is called broker-supported trading. These market-makers guarantee the above-mentioned full execution if investors choose the Frankfurt trading floor as their marketplace for order execution.
As an exchange novice, Lisa requires personal advice. Some discount brokers offer advice via a service branch or phone hotline. This assistance is useful when it comes to sounding out and realizing one’s own wishes and requirements. Some discount brokers also offer other services, such as a normal bank accounts, as well as a cash or credit card.
Lisa has decided in favor of a securities account with a discount broker – for merely practical reasons. It is easy to open a securities account via the internet and the account management comes free-of-charge. At the time of her decision, the transaction costs were to be the most favorable, too.
When opening her securities account on the internet, Lisa is asked to enter personal details such as her address and date of birth, as well as her stock-market experience. Security acccount banks are required by law to ask the latter. The Securities Trading Act (WpHG) stipulates that banks must acquire information on the knowledge and experience of their customers. However, the customer is not obliged to provide this sort of information. This procedure is known as self-disclosure and serves to transfer liability from the bank to the customer. Trading in securities is always subject to a certain risk, which the customer must be made aware of by the bank. Discount brokers, such as Consors, have developed specific risk categories, by means of which customers have to classify themselves. Before each transaction, the potential risk is pointed out to the customer.
Lisa experiences problems with her discount broker. The self-disclosure is not explained and she does not know what this information is used for. Only when she rings the broker is this clarified. However, she decides to stay with the broker for the time being.
Upon filling out the online registration form, Lisa saves the document as a PDF on her PC and prints out the form. She goes to the nearest post office, where her personal details are verified and all documents are forwarded to the securities bank. Only a few days later, she receives the information needed for activating her securities account online. A short and easy-to-comprehend letter guides her through the activation process on the internet, which also requires the login data that were sent to her separately for security reasons. This authorization data is entered when registering for the first time, and it must be personalized immediately.
The new passwords are to prevent unauthorized parties from accessing the account. The new online securities deposit account has been set up and Lisa would like to start trading right away. However, she’s read somewhere that discipline is of utmost importance. Otherwise, the exchange experience won’t be a successful one. This is why information must be procured beforehand and investment targets defined. Just how this is be done will be the subject of the second part of our series.