Things to Consider When Opening a Securities Account

If you are looking to open a portfolio to purchase index funds, there are a number of providers to choose from. There are significant differences in costs and product selection that consumers should be aware of.

Many banks, discount brokers, and so-called neobrokers now offer index fund trading. However, the first step is to open your own brokerage account. This basically works like a bank account. However, unlike a savings account, your money is not managed in a savings account. Instead, there are securities. These can be stocks, bonds, index funds, or ETFs (Exchange Traded Funds) for short.

ETFs are protected as special assets.

Securities in a custody account are held in “trust” in the name of the custodian bank, i.e. the customer. Therefore, they are not part of the bank’s assets. Therefore, even if the bank fails, the index fund is protected by a so-called “special fund” that is legally guaranteed, just like a traditional investment fund.

The purchase and sale of fund shares, including ETFs, is initially handled through a broker. The broker simply acts as a link between the person who wants to buy stocks or funds and the market. After purchase, they are stored in a warehouse. The broker and the custodian bank are usually the same company, such as Commerzbank subsidiary Comdirect.

For some smaller and newer providers, the trades are processed through a broker, but the securities are held in a partner bank. For example, Trade Republic works with HSBC, a major UK bank, and the securities are held in their German subsidiary, HSBC Germany. Every securities account also has a clearing account where deposits are recorded.

Opening a warehouse is often possible digitally.

Opening a brokerage account is as easy as opening a regular checking account. In addition to personal identification, which is often done through video identification using a PC or smartphone, consumers are also required to provide information about their professional status and previous experience in stock market trading.

The opening takes a few days until the warehouse is ready. As a customer, you now have a variety of providers that allow you to trade all kinds of securities. On the one hand, these are the classic “residential banks” such as Volksbank or Sparkasse.

From your main bank to a discount broker

For about 25 years, it has also been possible to buy securities through “discount brokers” such as Consorsbank, Comdirect or Flatex. However, there are no branches here, so personal advice is rare. In return, discount brokers offer their clients more favorable trading conditions.

Thomas Kehl of consumer and financial portal Finanzfluss says the cost difference is probably the main feature that distinguishes the two banking sectors. “There is a big difference in costs, depending on whether you choose a traditional branch bank. Usually, they take a part of your investment capital or take it to a cheaper online broker or now a neobroker.”

NeoBroker is intensifying the competition.

For several years, so-called neobrokers have also been offering securities buying and selling services. These are still quite young companies with prices that are much lower than discount brokers. Examples include Trade Republic or Smartbroker. Neobrokers make money by processing customer orders and ensuring liquidity on a particular trading venue.

And to find the right broker and stock exchange bank, you can use various current portfolio comparisons. For example, Stiftung Warentest offers such comparisons on its website. The consumer portals Finanztip and Finanzfluss also offer up-to-date overviews.

Fees 0-50 euros per purchase

For example, you can see how big the cost difference is when buying securities. If you want to buy 5,000 euros worth of stocks or ETFs, you will often pay 1% (50 euros) of the purchase price at a traditional branch bank.

At a discount broker like ING, the same purchase cost is only €17.40. There, you have to pay 0.25% of the purchase price plus a basic commission of €4.90. At Trade-Republic or Scalable Capital, i.e. neobrokers, the same purchase cost is around 99 cents or even completely free.

Finally, consumers should be aware of whether or not there is a deposit fee at the depot. Some branch banks charge a percentage of the deposit amount as a fee. If you have €10,000 in deposits, this would be 0.2%, or €20 per year. However, most online banks, discount and neobrokers no longer charge a deposit fee.

Beware of Savings Plan Fees

Consumers should also pay attention to fees when creating a savings plan. Some banks charge a flat fee or a fee based on transaction volume. Many savings plans (especially those from discount and neo brokers) already offer free savings. For example, many providers offer savings plans for very small amounts, and this amount is automatically invested in ETFs every month, for example.

If you have successfully created a portfolio, there is nothing stopping you from actually buying and selling ETF shares. If you already know what you want to bet on, you can simply enter the corresponding security identification number (WKN) or international identification number (ISIN) in the order form when purchasing. You can then define the amount you want to invest or the number of items you want to purchase.

“Depending on the situation, there may suddenly be no sales on the stock exchange or I may make a mistake,” says Markus Jordan of extraETF, an expert who recommends entering a limit when buying or selling. For example, if the current fund share is 100 euros, setting a purchase limit of 101 euros will only result in a purchase if this limit is not exceeded. Even in the stock market, at least part of the profit comes from purchases.