The 1% Stock Trading Rule

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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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Jay
11 years ago

an interesing rule, but very valid. i never really looked at it before, however since i am active i will definitely pay more attn. that being said my trades are always in the thousands so i don’t think this really applies but i think it could effect the sort of stradegy you employ when u trade. i was reading about this one dood, who made very small day trades for a small profit, typically anywhere btw 25 to 180 each. he paid a 10 fee per trade. if he paid a 30 it would severely cramp his style.

How to Invest with Small Amounts per Month | Million Dollar Journey
12 years ago

[…] 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 […]

Charles in Vancouver
12 years ago

Dividendgrowth: Again, this is a Canadian blog, and Canadians do not have access to American brokerages such as Zecco. Even when we buy US stocks we need to use brokerage with Canadian operations.

Dividendgrowth
13 years ago

One way to follow this rule is to buy index mutual funds like S&P 500 ones, which have low annual expense of 0.1%. Or if you must do your own stock selection in US, you can sign up for Zecco – 10 free trades per month is more than you need as a passive investor..

Tanady
13 years ago

Hello,

Your blog are really well organized and full of information. Thank you for sharing… (smile)

My name is Cornel Tanady, and have been doing some research about options trading.

Kindly visit my blog to know more about options trading and comments will be greatly appreciated.

Thank you very much.

Sincerely,
Tanady

MoneySheep
13 years ago

Before buying or selling (using an agent), you should analyze this: “Do this for me, I will give you 2% of my asset, is this reasonable?” The answer depends on your knowledge about the agent. The know-nothing person will probably say it is ok. If you know the agent takes no effort at all, and your data (say, from the annual report of the agent/broker) shows that their profit from doing this is huge, you know you are being taken advantage of, they can cut down their fee. Canadian don’t stand up for being gouged, so the financial institution keep milking the cow.

Another thorn is the real estate industry. Do this for me, I will give you 7% of my asset.

Personal Finance Article Round Up! - Million Dollar Journey
13 years ago

[…] Money has hosted the latest Carnival of Personal Finance.  My article on the 1% stock trading rule was featured as a 2nd stage […]

FourPillars
13 years ago

Ed, did those active traders give any indications of their performance?

12% mer is indeed shocking.

MIke

Ed Rempel
13 years ago

While I don’t buy individual stocks, this is interesting. I have talked to some active traders who get their costs down to 1% for both buy and sell.

However, they turn over their portfolio about once/month. A 1%/month cost equals a shocking 12% MER!

This is one of the reasons why almost all active traders lose money in the long run.

Ed

Blain Reinkensmeyer
13 years ago

Solid article Frugal! Will make a good read for my readers :P