Commission-free trading, also called zero-commission trading, is offered by some discount brokers. You can buy and sell stocks or exchange-traded funds (ETFs) without paying a trading fee. Fees can impact your investment returns, but there can be other costs to consider.
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Some brokers have limitations or conditions such as requiring a minimum trade size, maintaining a minimum account balance, or restricting commission-free trading to certain securities or certain number or types of trades.
It is important that you understand what commission-free trading might involve before you invest.
3 considerations for commission-free trading
While commission-free trading has its benefits, remember these 3 tips to help you make informed investment decisions.
1. Understand the other costs
While there may be no commission on stock trades whether buying or selling through some firms, others may charge a commission when selling. There might be other costs to consider such as foreign currency exchange (FX) and account fees (for example, inactivity fees, fees if you don’t make a certain number of trades in a month or if your account balance falls below or exceeds a certain level). There could also be trading fees for other types of securities or derivatives, such as options. Some brokers offer additional features such as real-time quotes through one-time fees or ongoing paid subscriptions.
2. Avoid overtrading
You may be tempted to buy and sell stocks more often than you should. For long-term investors, frequent short-term trades could have a negative impact on your portfolio. It can be difficult to time the market, and you may find yourself buying or selling stocks often at the wrong time. The bid-ask spread could represent a more significant cost if you trade frequently.
3. Know what services they offer
Many brokers offer additional services such as wealth management, financial advice and tax preparation. These services can be helpful beyond just selecting a broker that offers no fees. It’s important to choose a broker that offers products and services that meet your overall financial needs.
The right investment platform for you can depend on many factors, in addition to trading costs.
Most brokers that offer commission-free trading are online platforms with self-directed trading accounts. This means the services are delivered through a website or mobile app, and you will be responsible for making your own investment decisions.
Find out what types of securities qualify for commission-free trading and if there are any conditions or limitations. Ask yourself if those types of securities match the ones you may consider in your portfolio.
Additional services or features may also be important to you. Find out what services are offered and if there are additional fees, how much you may have to pay.
If it is your first time investing, some brokers provide limited-time practice accounts to help you become familiar with trading and the platform’s interface. You can decide if the platform is easy for you to navigate. Practice accounts typically provide you with virtual money (currency with no value) and simulate trades using real-world data.
Payment for order flow
Payment for order flow, or PFOF, is not allowed in Canada. In some countries, this practice is permitted and brokers may receive compensation for routing your stock trade to a third-party organization for execution.
Difference between Canada and the U.S.
You’ll want to keep in mind that trading rules and practices differ in some respects in Canada compared to other countries such as the United States. Differences in trading practices that are not permitted in Canada (such as payment for order flow) may subsidize commission-free trading in other countries.
In Canada, very few dealers offer no commission for trading securities. Commission-free trading is primarily offered by online discount brokers (also called order-execution-only firms [OEO]) in Canada.