8 - Paying Low Commissions is the Key to Success
Your number one need is to find a brokerage firm with the lowest possible commissions that can offer you the best service. Paying low commissions is the key to success; lowering your costs, increases your profit. During my first year of trading when I was paying $28.95 commissions per trade I had calculated at the end of that year that 70% of my losses came from commissions. This shows how critical it is to pay low commissions. Ideally your commissions per trade should be lower than 1.00% of your investment. Commissions between $5.00 and $10.00 should be considered fair. However, be careful that some brokerage firms may charge ECN (Exchange Commission Network) fees or SEC (Securities Exchange Fees). ECN fees may get charged on both Canadian & US markets. Basically this is a fee charged when you remove liquidity from the market. Market orders will often trigger ECN fees because you are going against the market’s purpose of functioning like an auction. When you place a market order whether to buy or sell, you simply accept to pay or sell at the best price available. Placing limit orders are best to avoid ECN fees. However, if you place a Limit order within the bid/ask spread or if your order is filled within a few minutes, you will most likely be charged ECN fees. ECN fees are usually around a quarter of a penny per share. This may seem meaningless to even bother to mention ECN fees when you hold only 100 shares of a $50 stock. However if you hold 10000 shares of $0.50 penny stock you can end up paying very hefty commissions. Assuming you pay $5.00 commissions per trade and ECN fees are $0.003 per share, you would get charged 10000x$0.003= $30.00 ECN fee+ $5.00 commission. You would end up paying much higher commissions than you would with a bank since bank usually only charge a high commission without ECN fees. ECN fees will usually be charged if orders are executed within the first few minutes of market opening (9:30 am – 9:35 am). ECN fees will always be charged on AON (All or None Orders), on illiquid stocks (penny stocks), and orders filled during extended hours (pre-market and after-hours). To avoid any ECN fees, your brokerage firm may allow you to place MGND (Managed) orders handled by a market maker rather than a direct access order. Please note than MGND orders are the only type of orders than can be placed with banks as your trade order may not always go directly into the market if the bank has shares in its inventory and it considers it more profitable for them to sell you their shares. Managed orders are slower to get filled and this may cause you to not always get the best price available that you would get with a direct access order that goes directly into the market. ECN fees are not that meaningful unless you trade thousands of shares. SEC fees can be charged on US exchanges only when you sell or short a stock. The SEC fee is charged based on the value of the trade rather than the amount of shares. For example, if SEC fees are $0.0000169 and you sell 100 shares of a US stock at $30.00 you will incur a $0.0507 fee (100x$30.00= $3000.00x$0.0000169). When selecting a brokerage firm you must be careful that they won’t charge you any type of fees, such as quarter fees for not maintaining a certain balance in your account. The next thing you’ll need to know how to figure out is how to transfer funds between your brokerage account and your bank account. If you are trading with the bank, your funds will usually be directly accessible at any time. If you trade with an independent brokerage account you will be able to do EFT (electronic fund transfers) which can take up to 5 business days to clear and arrive in your account. If you are Canadian, you can do EFTs in and out of your bank account easily in Canadian funds. However, if you are trading US stocks and want to send US funds from your US bank account (Canadian based) to your brokerage account you will have to set-up PAD (Pre-authorized deposit) agreement which will grant permission to your brokerage firm to transfer US funds to your brokerage account when you instruct them to do so. Some brokerage firm will set a limit on the minimum amount of funds you can transfer. Also it can take up to 10 business days for the funds to clear. Keep in mind that you can still do EFT from your brokerage account to your US account (Canadian Based). Up until recently banks use to force Canadian traders investing in US stocks to always exchange back their funds into Canadian dollars after they sold their stock. This made it practically impossible to make profits with US stocks because not only would you be paying commissions in the exchange rate, the Canadian dollar has historically been positively correlated with the US market. What this means is that when your US stocks are going up and you sell them at a profit, the Canadian dollar has more often than none gone up. This made it very hard to make a net gain in Canadian dollars after being always forced to exchange your funds the moment you sell your US stock. Thankfully, times have changed and now most brokerage firms (including banks) allow you to keep the US funds and exchange it when you want and when it is most profitable for you rather than for the bank.
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