I mentioned in the Questrade Review comments about the 1% stock trading rule. I'm sure that some of you seasoned investors and traders alike know about this rule, but I'm going to explain it for the people that are fairly new to the investing world.
I first learned about this rule from fool.com, and it basically states that: Your trading commission should never exceed 1% of the value of the trade. The reasoning for this is so that your trading commissions don't eat into your profits too much. Basically the same reasoning for picking LOW MER mutual funds/ETF's.
For example, say you have an account with a big bank brokerage who normally charge around $30/trade. If you were to follow the 1% rule, the minimum trade that you should make is $3000 ($30/1%). If you have an account with Interactive Brokers ($2 for < =200 shares) and the trade is less than 200 shares, then the minimum trade amount would be $2/1%=$200.
As you can see, if you are just starting out and have a low balance, it would make sense to go with a cheaper brokerage due to the fact that you can diversify with your cash, even if it means buying smaller quantities.
Moral of the story? If you want to maximize your returns, try to pay as little as possible in commissions. If you haven't already, check out my Canadian Discount Brokerage Comparison article to get a general idea of what's out there.
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