The era of commission free brokerages has finally arrived in Canada and the United States.
What started this was the popularity of Robinhood in the United States. Robinhood allows investors to trade stocks via an app on smart phones with zero commissions. Robinhood charges conversion fees of 1.5% and only holds US dollars. Therefore, it is best to only buy US stocks when using Robinhood.
Now more and more brokerages in United States are offering zero commissions and will allow you to have accounts in USD and Canadian dollars.
In Canada, the zero commission fee brokerages era has recently started. A robo-advisor named WealthSimple launched a smart phone app in March 2019 called WealthSimple Trade. WealthSimple Trade works similar to Robinhood. The accounts only hold Canadian dollars. So, it is best to only use WealthSimple Trade for Canadian stocks.
Advantages of Commission Free Brokerages
The major advantage is ability to buy and sell shares with zero costs. An individual can now buy stock without paying a fee. This means a higher yield on cost than an investor who has to pay a commission. Yield on cost is simple the annual dividend amount per share dividend by adjusted cost base per share multiplied by 100%. Adjusted cost base is total of purchase dividend by number of shares. When dealing with a small investment, this can make a big difference. An individual can buy a relative good stock or ETF, with a $20 dolllar deposit.
Without commission fees to worry about, an investor will likely purchase stock at a quicker pace. This means investors are putting their money to work much quicker.
Some people never have invested before until the zero commission brokerages pop on the scene. More and more people have started investing in recent years.
Investing can change peoples' lives when they receive their first dividend, distribution or interest payment from a position.
Disadvantages of Commission Free Brokerages
A lot of people do not do a thorough analysis prior to purchasing a stock. This requires a great deal of time. When using a commission free brokerage, an investor will just buy the shares with a market order if they like the price of the stock.
Without doing a proper fundamental analysis, they are not going to know to have a good indication of what the stock is actually worth. This could cause an investor to buy a stock when the price of the stock is overvalued.
Purchasing a stock when it is overvalued reduces the yield on cost and can lead to a bigger capital loss or smaller capital gain upon selling.
Another major disadvantage of a commission free brokerage is the platform or app will have less features then a brokerage that charges higher commissions.
Disadvantage of Purchasing Small Amounts
Investing in a non-registered account means an investor has to keep track of dates when they buy and sell shares. Every time more shares of the same stock is purchased, the investor has to due an adjusted cost base and adjusted cost base per share calculation. It can get complicated if you buy "X" number of shares and then sell "X-5" shares" followed by more buying or selling of shares at a future date.
Can it get more difficult keeping track of your buy and sell transactions in a non-registered account. If an individual buys ETFs, funds, or REITs in a non-registered account, your a paid a distribution instead of a dividend. A distribution payment can consist of dividends (foreign or domestic) , interest (foreign or domestic) , and return of capital. On your tax slips from these account will indicate the breakdown of these amounts. Return of capital is tax free money until you sell. This amount must be substracted from your adjusted cost base and you will have a new cost basis going forward. The return of capital leads to a smaller capital loss or larger capital gain when you sell.
For registered accounts, investors should keep track of their adjusted cost basis as it can show you the actual performance of your positions. Return of capital can be ignored as you won't get a tax slip for it.
Investing small amounts and making multiple transactions of a stock can be very time consuming to maintain accurate adjusted cost base for each position. Using a non-registered account means an investor needs to keep track of account statements, dates of transactions, cost basis and keep these records for 7-10 tax years after completely selling the position.
Just keeping account statements will not suffice in this situation. I highly recommend making a spread sheet for each position or a separate sheet in the same spreadsheet for each position. At tax time, you have to compare your tax slips and trading summary with your spreadsheet and actual account statements for accuracy.
There are definitely investors out there, that purchase investments in registered accounts that do not keep track of there cost basis. Although it is not required as no taxes are paid, keeping track of cost basis shows how your individual positions are performing.
Overall, zero commission brokerages make it easier for people to get started in investing. Investing can have a positive affect on a person's well being. People often feel pissed working at a dead end job or low paying job if they are not seeing improvements in their finances. Making money via distributions or dividends shows people that they can make money via ownership of assets.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk