Buying stocks in small lots

Q – I believe buying stocks outside an RRSP is a good idea. My question is with a lot of good solid companies I find that share prices are anywhere from $25 and up. It is hard for the small investor to buy say a lot of 500. The online trading account I just opened charges a flat rate of $24 for trades under $2,000.00. Does it make sense to buy say 10, 15, or even 20 shares of a good company instead of waiting until I get enough money to buy say 1,000. The only thing that is stopping me is if I buy say 20 shares of one of the banks, the commission I would be paying would take a while to be worth it. On the other hand over time I could build up a sizeable holding of stocks in various sectors. Any comments? – P.R.O’T.

A – Brokerage commissions do decline in percentage terms when you invest larger amounts of money. However, unless the amount you propose to invest is very small, they should not be a deterrent to your investing style, especially if you are buying for the long term. After all, a commission of $24 on a $2,000 trade works out to just 1.2%.

The normal “board lot” of a stock is 100 shares. There us to be a substantial premium for buying “odd lots” but these days the commission is usually structured in the same way as for a board lot trade, that is on the value of the transaction (assuming it is above the firm’s minimum). However, the policy can vary from one company to another so check first.

Assuming this policy is in place, you should pay the same commission (in percentage terms) if you buy 20 shares of a stock trading at $100 (total investment $2,000) as if you buy 100 shares of a stock trading at $20 (again total investment $2,000). However, you may find it is harder to get a fill on an odd lot order, especially if the stock is thinly traded.

The bottom line is that you should not be penalized from a commission perspective for building your portfolio in the way you describe, as long as each order exceeds the firm’s minimum. Below that, you’ll get socked – for example, one firm I am aware of imposes a 10% commission on trades under $850. That can really add to the net price you pay per share! – G.P.