By Robb Engen, Boomer & Echo
Special to the Financial Independence Hub
As a Canadian investor, I’ve been pleased to see that most of the big bank brokerages lowered their cost per trade from $29 to under $10. Previously, most investors needed a minimum of $50,000 in assets to qualify for lower trade commissions. This has presumably levelled the playing field for small investors.
When I first opened a discount brokerage account with TD Waterhouse (now TD Direct Investing) back in 2009, high trading commissions were the norm. I chose TD because I had an existing banking relationship and my $25,000 investment met the threshold to waive the $100 annual admin fee.
At the time I wasn’t aware of online brokerages like Questrade – which offered trades for as low as $4.95 with no administration fees.
High costs for small investors
The costs added up over the years. From 2009 to 2011 I made 36 trades and paid a total of $1,044 in fees. Had I been with Questrade, I would have paid a fraction of that amount – just $178.20 in trading fees.
In 2012 my portfolio reached the $50,000 threshold and TD reduced my cost per trade down to $9.99. Over the next two years I made 19 trades and paid $190 in fees. With Questrade that amount would’ve been cut in half.
To mitigate the high cost of trading I would make sure to buy at least $3,000 worth of stock per transaction. For example, if there were a stock I wanted to buy at $30 per share, I’d buy at least 100 shares. That made the $29 fee more palatable, at less than 1 per cent of the purchase.
Although it cost me over $1,000 in trade fees to build my portfolio, as a small investor $29 trades didn’t bother me much. It caused me to put a lot of thought into each trade before I pulled the trigger.
Will lower trade fees lead to more frequent trading?
Studies show that frequent trading can be hazardous to your wealth. It’s not just the cost of buying and selling shares, but our poor behaviour that leads to lower returns.
We try to time the market and act on the opinions of so-called experts who predict the direction of the stock market. We move in and out of hot funds and growth stocks, often chasing last year’s winners.
Will lower trading fees simply encourage more active trading? Consider a recent TD promotion where the bank offers 300 free “I’m feeling more confident” trades. At my current rate of trading it would take 50 years to burn through 300 trades, yet the TD promotional free trades expired four months later.
What could an individual investor possibly gain by trading 300 times in four months?
More competition has led to lower trade fees for investors, and that seems like a good thing. But investors shouldn’t use lower fees as an excuse to trade more.
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on the site and is republished here with his permission.