I originally published this article in 2009, but have since updated it with more relevant information. Since the last article on discount brokers that offer commission free ETFs, new investor readers have been requesting more information on investing small amounts per month.
When people get their finances in order and decide to invest, it’s common to see only small amounts allocated per month for investing. Another situation where this happens is if people are just starting the Smith Manoeuvre with just over 20% equity in their home. In this case, the credit limit on the HELOC only increases by a couple hundred every month which is then available to invest with.
However, investing small amounts at a time can be quite expensive due to fees from discount brokerages on every transaction. If you are in this situation, there are a few ways that you can reduce the trading costs.
- Find a Low Cost Brokerage. If you’re set on buying stocks with your savings, then it’s probably in your best interest to find a lower cost discount brokerage. In Canada, the cost to trade can range from $4.95/trade to $29.99/trade depending on the brokerage. Here is my summary of some of the discount brokerages offered in Canada.
- Commission Free ETFs. As an extension to using a low cost brokerage, if you are considering an index investing strategy with a low cost portfolio, going with a discount broker that offers commission free ETFs will save a bundle on regular trading commission fees. When evaluating a discount broker, make sure to look at other features like USD registered accounts, no annual fees, and low trading commissions. Here is my list of the top discount brokers that offer commission free ETFs
- Accumulate Cash. If you have a small amount to invest with every month, why not accumulate the cash so that you can make a larger purchase. This would help reduce transactions which in turn reduces trading costs. For me, I use the 1% trading rule. That is, the purchase commission should never be more than 1% of the total transaction cost.
- SPP/DRIP. Another strategy for smaller sums of money is to join the Stock Purchase Plan (SPP) or Dividend Re-Investment Plan (DRIP) of companies that you like (if they offer them). If the company offers SPP, you can purchase small quantities of stock on a regular basis with little or no transaction fees. Most of the blue chip dividend payers in Canada offer a SPP/DRIP plan.
- Invest in low cost mutual funds instead. Before commission free ETFs were offered, the go to choice for investing small amounts per month was to use low cost mutual funds. While still a decent choice (we still have our RESPs with index mutual funds), mutual funds also allow small amounts to be invested on a periodic basis with no extra fees (besides their MER). They can also provide much greater diversification than purchasing small amounts of a single stock. If you’re looking for a place to start your mutual fund research, the TD e-Series is a good bet.
Do you have any other suggestions for reducing trading costs?