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portfolio strategy

The cost of buying and selling stocks as a do-it-yourself investor has declined in 2014 to levels of near insignificance.

Most brokers now charge a flat commission of $5 to $10, and it applies to all clients without regard to the size of their account or the number of trades they make. The new pricing is a model of how to make investing more accessible and relevant to everyone. But it also demands some strategizing and vigilance on the part of investors.

Brokers hope to offset lower commissions with increased trading, but that may not materialize in today's bruising markets. As a result, brokers could try to shore up their revenues with miscellaneous account maintenance and administrative fees. Low commissions will be helpful if they get people to start investing money that is sitting unproductively in cash, but they may also offer a temptation to trade frequently. An active investor is not automatically a successful investor.

The latest and most dramatic of the recent commission cuts came this week from CIBC Investor's Edge, which now charges all clients a flat $6.95 to trade stocks and exchange-traded funds. RBC Direct Investing, which began the latest round of commission cuts back in January, has a $9.95 rate for all, and most of its big bank competitors are right in that same just-under-$10 zone. Rounding off the list of brokers to reduce commissions lately are Qtrade Investor, which two weeks ago introduced a flat $8.75 commission, and Credential Direct, which recently locked in at $8.88 (note: active traders may pay a little less).

A year ago, clients of most firms were paying $20 to $29 unless they had $50,000 in their accounts or traded frenetically. CIBC's $6.95 commission used to apply to clients who had $100,000 in business at Canadian Imperial Bank of Commerce and its divisions. Now, this rate applies to everyone. "We're trying to bring the marketplace to the everyday person, younger clients in particular," said Marybeth Jordan, managing director and head of Investor's Edge.

Commissions for trading stocks and exchange-traded funds are no longer the issue they were when they cost $29. But let's not get complacent. Investors still need a playbook for a low-commission world. Here are five points to consider:

1. Watch out for other fees

Most firms offer their flat rate commission without fine print, but there are exceptions. At Qtrade, electronic communications network (ECN) fees may add a small amount to trades of Canadian stocks that are done with market orders (you pay or accept the market price) and limit orders that get executed right away (limit orders have a price ceiling or floor). Questrade also says ECN fees may apply.

Don't equate low commission costs with a general laxity on costs at online brokers. Some have account maintenance fees of $25 per quarter or $100 per year for clients with less than $15,000 to $20,000, although there are ways around these charges. At RBC Direct Investing, for example, new clients and those with a student banking package don't pay a maintenance fee, and neither do clients who set up a program to contribute $100 a month or more to their account.

2. Even low commissions can add up for small accounts

You need an account with $15,000 at least to approach cost effectiveness in making 12 trades at $6.95 per year. At that level, the total amount of fees would reduce your returns by 0.56 per cent. With commissions of $9.95, the threshold rises to $20,000.

3. Don't trade more – trade smarter

Investor's Edge paid for some polling on trading to accompany its announcement about the $6.95 commission and it suggests that 63 per cent of do-it-yourself investors would trade more if they paid less in commissions. In a sense, this is good news. One of the online brokerage industry's biggest challenges is the investor who opens an account, adds some money and then does nothing with it. Investors lose by holding do-nothing cash, and brokers lose because no commission revenue is generated.

Smart trading can mean selling a dud stock pick rather than hanging onto it indefinitely. It can also mean rebalancing your portfolio so that you add to some of the components that have lagged the market while trimming your holdings that have done well. If low commissions turn you into a more frequent and speculative trader, you may end up making money only for your broker. Bad stock picks hurt only a bit less when you pay a sub-$10 commission.

4. ETFs can be traded free at a few firms

Questrade and Virtual Brokers waive the commission entirely when you buy exchange-traded funds, though you pay the usual charge to sell. Qtrade and Scotia iTrade have a limited number of ETFs you can buy or sell at no cost. In a way, these deals are more significant than super cheap stock-trading commissions. You could set up quite a good portfolio with four or so ETFs and rebalance once or twice a year with fees as low as zero.

5. Price is much less of a differentiator between brokers than it was

Ultimately, online brokers are just a way to have your orders to buy and sell investments executed. On that basis, the cost of trading is a huge differentiator. Or, at least it was back when the gap between independents like Questrade and Virtual Brokers and the big banks was in the range of $20 a trade. Today, most brokers are within $5 of each other, which isn't enough to be a strong selling point unto itself unless you trade a lot.

So think hard about the other aspects of doing business with a broker. Does the website help speed you along in completing your investing chores? Is there useful research that will help with the kind of investing you do? Are there resources to see how well your account is performing? Are the educational resources you need available in a convenient spot?

With stock-trading commissions down to near insignificant levels for many investors, these are the things we need to look at closely in choosing a broker. I know I'll be putting more emphasis on these factors in my upcoming ranking of online brokers.