How to Invest with 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.
- 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) 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 plan.
- Invest in low cost mutual funds instead. Personally, if someone is just starting out with only small amounts to invest, I recommend that they start with low cost mutual funds. The reason is that mutual funds allow small amounts to be invested on a periodic basis with no extra fees (besides their MER). They can also provide much greater diversification that 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?