When choosing a brokerage account, I notice there are two different ways stocks can be held – either in a CDP or Custodian account, each with different charges.
What is the difference and is the extra cost of holding stocks in my own CDP account worth it?
When choosing a brokerage account, you will see that some accounts are designated as custodian accounts, sometimes referred to as pre-funded accounts.
Commissions for these types of accounts are cheaper than “regular” brokerage accounts, because your brokerage firm is helping hold your stocks. For brokerage accounts for CDP-held stocks, your broker is the facilitator of the transaction, and passes on the charges that CDP levies.
For stocks held in your CDP account, you legally own a share of the company and would be invited to attend and vote during AGMs, and receive other forms of shareholder communication.
Companies you invest in will also notify you directly about corporate actions, which include rights issue and dividend re-investment plans. For custodian accounts, your brokerage firm will be the ones notifying you regarding any corporate actions.
When holding investments in your CDP account, you can use brokerage firms interchangeably to execute your trades. You can buy a stock using Brokerage A and then sell using Brokerage B.
If you trade frequently, you can take advantage of the lower fees of custodian accounts. If you plan to hold investments for a long time and prefer a stronger legal basis and exercise your rights as a shareholder, then you wouldn’t mind paying higher charges for your investments to be held in your CDP account.