How does a securities account work?
Using a securities account gives you access to new areas of investment, but you need to know a few things about the subject.
The subject of securities accounts is complex enough, so if this article does not give you enough information, contact us to help answer your questions. Before we dive in, let’s look at a basic concept:
What is a security?
A security is an instrument that represents a property right or claim.
Types of securities
- Debt securities: these are typically corporate bonds and government bonds
- Membership (equity) securities: these are shares and units in investment funds
- Securities with commodity rights: an example is a public warehouse warrant
Forms of appearance
Securities in certificated form
These days, they are increasingly rare, but not impossible. It contains the formal requirements specific to the security in question, as laid down by law. Traditional, tangible paper is included here. These you place in a safe place yourself.
They embody the same rights, have the same statutory formalities, but exist only in computerised records. It is nothing more than an electronic sign or token. But you have to store it somewhere. That is what a securities account is for.
The securities account
A securities account is a type of account that is very similar to a bank account. You can hold cash in it just like a normal bank account and, surprisingly, you can also hold securities.
It’s very similar to a bank account, and it works almost identically. It’s just that while you can only hold forints in your forint account and only euros in your euro account, i.e. you need to open a separate account for each currency, here you hold securities in a single account. You don’t need to open a separate account for each.
What can you hold in the securities account?
Technically, any securities account can hold the following even if it is not available at your financial institution:
- investment units (units of a traditional mutual fund or ETF),
- government securities
Who can manage this account?
The owner of the account, of course, and the owner may also grant a power of attorney, either when the account is opened or at a later date, either on an ad hoc or permanent basis. In this case the authorised representative can also manage the account.
Taxation of the securities account
For now, we’ll just look at the rules under Hungarian law on the taxation of securities accounts, but you should also seek advice from a specialist. The subject matter and scope of this article, as well as the complexity of the tax legislation, do not allow for comprehensive information.
Tax on gains in a securities account is governed by the Income Tax Act. As a general principle, controlled capital market transactions (e.g. trading in shares, foreign exchange, units) are subject to the double tax treaty. Hungary has such treaties with the European Economic Area countries and the USA. It is important to note that anything that does not fall under controlled capital market transactions (e.g. cryptocurrency trading) is not covered by this convention.
For a standard securities account
Profits earned are taxed depending on the jurisdiction, which you should certainly expect:
|Type of income||Tax payable||Tax rate|
|Income from controlled capital market transactions (e.g. exchange gains)||Income tax||15%|
|Interest received||Interest tax|
|Dividends received (from Hungarian issuer)||Dividend tax|
|Dividends received (from non-Hungarian issuers)||Dividend tax||According to tax treaty|
Long-term investment account (TBSZ, NYESZ)
A single tax and contribution liability arises on profits earned on money deposited in a TBSZ or a special type of TBSZ, the NYESZ (and assets purchased from it), depending on the length of time since the account was opened. This applies regardless of whether they are otherwise subject to interest tax, capital gains tax or dividend tax.
The rate (calculated without the collector year):
- Until the end of the 3rd year: 15%
- Between the 3rd and 5th year: 10%
- After the 5th year: 0%
This account type is only available with Hungarian service providers.
Security of the securities account
Keler Zrt’s records
The accounts of intermediaries and issuers in Hungary are held by Keler Zrt. This is also for your security. If anything should happen to the company where you have opened and use a securities account, you can be sure that the securities in which Keler Zrt. has registered you as the owner, you will remain the owner. You can request a transfer after opening a new account and continue in the same way.
BEVA, OBA guarantee
Currently, investment services and related ancillary services can only be performed with a MNB license. Companies supervised by the MNB fall under the jurisdiction of BEVA, and when you open a securities account, your money will be protected. You are eligible to receive compensation up to €100,000.
When does BEVA pay?
When the company providing the securities account cannot issue the security in your name. This most commonly means that they have gone bankrupt, or that there has been a criminal offence.
When doesn’t BEVA pay?
There are some cases that are outside BEVA’s remit:
- you have suffered a loss of exchange rate: this was your own decision, but the provider can still settle the security
- you contract with a company operating irregularly without a licence: they are not subject to any regulation until they are caught
- foreign-based service providers: they are subject to the rules of their home country
- money held in a securities account is OBA jurisdiction
There are some exclusions, they are not paid by BEVA even if they would otherwise be eligible:
- the State
- the budgetary authority
- a permanent 100 % state-owned company
- the local authority
- the institutional investor
- the mandatory or voluntary Deposit Guarantee Fund, the Institutional Protection Fund, the Investor Protection Fund or the Pension Fund Guarantee Fund
- a separate public fund
- an investment firm, stock exchange member or commodity exchange service provider
- a financial institution
- the Magyar Nemzeti Bank (Hungarian Central Bank)
- and the direct relatives of the above
However, reading these lines, I think it likely that you are none of the above.
Considerations before opening a securities account
Which stock exchanges and securities are available through the account?
Before you jump into the fees alone, look at what is on offer in the light of what you want to use the account for.
A bank may only offer its own investment funds, so it may be able to work cheaply, but you may not necessarily benefit.
You can check the BSE website to see who is doing what in Hungary.
What services are available through a securities account?
There are many accounts that can be opened by paying none (most of them are). This does not mean that you have access to everything. Some asset funds are only available above a certain limit.
Is there any expert help?
It’s good to know who to ask. If you don’t know how to trade, you may need help in making your decisions, otherwise you are very likely to make a loss. Stock market trading is nominally very simple, just a few keystrokes. If it really were, most clients would not be at a loss.
No one will make the decision for you, but in a good case, instead of just “nudging” you to switch and generate revenue for the bank, they can point out the points that make you make the right decision.
The fees charged
The fact is, your bottom line is strongly affected if you are charged high fees. But it’s easy for cheap meat to turn into thin meat. Obviously it’s OK if it’s cheap, but before you make a decision based on that alone, look at the fee schedule from other angles:
- how transparent the pricing is: it’s not a problem if the list is long, but if it’s chaotic, that’s a warning sign
- how their pricing compares to others: it may be cheap because it gives just a little or because it has a new market entry target, for example. It may be expensive because it is generous with extra services, or it may be expensive because it thanks you but has no need for new customers.
- what you want to use the account for: if you want to daytrade (i.e. place several orders a day), the order fees is your primary concern, for a longer-term investment the size of the account management fee is more important
Don’t expect to get total free promotion like you would with a bank account. Everyone prices their service under some heading, even if it is advertised as commission-free.
How easy is it to use the service?
Here you can think of many things that come up while using it.
- How easy is it to contact them? Is there a language barrier?
- How user-friendly is the online interface?
- Do they respond immediately when you make a withdrawal or do they take their time?
Are there any warning signs?
I would predict that there is no method that will help you 100% with this, but choose an intermediary that operates under strict supervision.
Are there any listings when searching for a company that are more likely to cause you to be distant?
What can you find about them on the internet?
I’m not necessarily just talking about whether bad news has been published about them.
There was no bad news about Buda-Cash until the authorities stepped in, and chances are you will find something about a sufficiently long-established and otherwise stable company that is worth chewing on.
Instead, here are more reasons to back off:
- a search for the words “scam” or “fraud” and the name of the company will return relevant results
- too many negative customer reviews
- a promise of a quick riches
How is the website?
If it’s severely lacking, it’s rarely a sign that it’s being developed. Most of the time it lacks the permission of the supervisory body. It is easy to tell which one it is. If they’re just developing the site (maybe your browser doesn’t put the image together properly) but everything is in order, you’ll find them on the MNB list.
How stable and secure is the company?
I probably don’t need to explain this point. To be able to afford and keep good professionals, they need money. Not to mention that if they want to serve their clients with the right level of quality and security, it is never free.
How aggressively do they “push”?
A serious brokerage firm, even if it advertises itself, does not push too hard. Neither the cold-calling out of the blue, nor the preference for robo-marketing to get as many deals as possible, nor the first offer of OTC transactions, are signs that you are dealing with a reliable and beneficial company.
How can you reduce your risk?
If you’re worried about making the wrong choice and something happening to your money, consider the following options:
- you can open more than one account in Hungary, the likelihood of something going wrong everywhere at once is very low
- if you have very little trust in your home provider, you can open an account online where you deposit your money with a foreign provider, in which case it is advisable to choose one that is as strictly supervised as your home one
- you keep only enough money in a securities account to execute a few orders, transferring money from an external bank account for new orders
- finally, the simplest: if you expect something to go wrong with your chosen provider, i.e. you don’t trust it, choose someone you can trust.
What can you do if you are not satisfied?
In the event that you want to switch providers and close an account, there are generally two things you can do depending on whether the new brokerage firm trades the securities you already have.
- if they don’t, you sell (at a pricelevel that is unfavourable to you, you either wait it out or realise the loss)
- if you are lucky, they are available in the new location, in which case you request a transfer from one account to another, similar to a bank transfer
Advantages of a securities account
Optimally (in other words, if you’ve chosen well), you’ve got an account that:
- no time-limit: it has neither a maturity nor a mandatory holding period
- flexible: you can use it according to your own risk appetite, goals and capabilities, choosing the security that suits you
you have no obligation to make a deposit: if you want it to be a lump-sum investment, it will be a lump-sum; if you want to make several deposits, but even at irregular intervals or in different amounts, you can do so
- potential for high returns: if you use it well, you can have outstanding return potential, far greater than most other investments. You can also increase these gains with various mandates (e.g. leverage). But remember that risk and return go hand in hand.
Disadvantages of a securities account
There are two sides to the coin, even for the most optimal choice for you:
- requires expertise: expertise on your part or that of a private banker is essential to choose the right security
- it is subject to legal proceedings: the money deposited here is managed within the framework of a banking relationship, i.e. it can be collected, and in the event of death it is subject to probate proceedings
- difficult to optimise taxation: even if you hold money in a normal securities account for a long period, your tax liability does not cease.
- difficult to compare tariffs: many providers, many different tariffs, so it is very difficult to wade through the tables
Unit-linked vs. securities account
Based on the fact that you can access investment funds through Unit-Linked life insurance either, it’s fair to ask which you’re better off with. There is no clear black and white answer to this, some people use both in parallel.
Common features of a securities account and unit-linked insurance:
- it can be used for retirement savings
- you can invest, thus gaining a capital gain, which is usually higher than you would get in a bank, for example.
- you are sure to find the right solution for the time horizon of your choice (medium and long term)
|Unit-linked life insurance|