Should you go for a discount brokerage? One of the most important factors in the growth of anyone’s stock portfolio is not immediately obvious. This factor are the amount of charges that you pay over the years.
Dealing costs – the hidden factor in investor success
There are three reasons for this. The first is self evident, charges cost money. The second is that charges tend to be ignored more than dividends or the valuation of companies can grow ignored by an investor. Finally there is the issue of compounding.
Let us explain compounding. If you pay an amount early in your investing career the foregone investment is compounded so that the $100 you paid in year 1 is in fact $500 of investment worth when your original portfolio grows five times in value over time (assuming you manage this). If you can through a discount brokerage halve that figure you will have gained $250, not just $50.
The fact is that if you are a frequent trader this is actually going to be a larger part of your costs. Of course looking for over valued companies, playing the trends and going for stocks with a strong income stream are important – but watching your costs can be almost as important. What’s more, watching your costs is easier, more predictable and less risky than the more talked about factors in investment success.
How to find discount brokerages
So where do you find discount brokerages? The easy answer is that you don’t find them in the big five banks. You’re also unlikely to find them in any high street bank. As in most other areas of life you pay for convenience. So, sadly, if something is cheap you usually have to seek it out. Discount brokerages have always existed for the small investor. However, it used to be the case that you would have to buy a specialist investor magazine and look through the advertisements on the back pages.
Discount Brokerages on the Internet
Like most businesses, discount brokerages are now on the internet. This means they are far easier to find. It also suits the “execution only” model of discount brokerages as you now can simply put your order through the internet without even having to phone a person to take down that order.
What are you missing with a discount brokerage?
So why are discount brokerages so much cheaper than their full service rivals. Essentially it comes down to research. Whereas a traditional broker would call you and discuss your investment aims and risk tolerances, and then recommend a stock that he or she thought would match your requirements, based on their knowledge of the stock market, with a discount brokerage all this is now down to you.
There are obviously a lot of people that will still benefit from a traditional full service broker, and who should pay for this extra cost. However if you are confident that you can research the market as well as, or better, than the stockbrokers and that you are comfortable with your requirements, then a discount brokerage may be for you.
What should you look for?
There are a number of factors in choosing a discount brokerage. The most obvious is price, or commission, per trade. This may be less for you if you have more than $100,000 in assets or if you are a frequent trader (50 trades a year or more). Some discount houses allow for tax free savings accounts and pension funds, others don’t. Some will let you hold mutual funds, foreign exchange (forex) and dividend reinvestment plans, others won’t. Again there are differences as to whether you can get real time price data, and whether you have to pay for this.
Some discount brokerages active in Canada
There are three main discount brokers in Canada, Scotia i-trade (formerly E-Trade), Interactive Brokers and Questrade. CIBC and Trade Freedom also have a presence. Others can be classed as discount brokerages for frequent traders – such as Credential Direct – or high net worth individuals – such as TDW.