How – and when – to use the growing number of free trades offered by brokers

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TD Direct Investing recently announced that it has increased the number of free trades it offers from 50 to 100 per year. Other discount brokers are doing the same. Both numbers sound high to a person committed to steady, long-term investing such as me.

I’m a big believer that incentives drive behaviour, so it’s clear what these firms are encouraging their clients to do: Trade, trade and trade some more.

Before looking at how good this is for the clients, it’s useful to understand what’s in it for the brokers, keeping in mind the warning label for the digital age – if you’re not paying for the product, you are the product.

Offering free trades attracts customers and brings assets to the brokerage platforms. That, in turn, gives the companies opportunities to charge other fees, such as foreign exchange, and to up sell other services. The bane of a discount broker’s existence is a steady, long-term investor who builds a diversified portfolio with exchange-traded funds and sticks with it.

So, what’s in it for the investor?

This newcomer brokerage is the latest to lure DIY Canadians with free trades

Taking control

You’re taking control of your investments when you do your own trading. And as the Questrade ads emphasize, it breaks you away from what your parents are doing.

You save money by not paying for professional fund management and financial advice.

It can be fun, even thrilling, in good markets. Like sports betting, success produces dopamine.

And it’s an antidote to FOMO. You don’t have to sit out the stock market discussions at work or at the gym, which is a real problem with the aforementioned ETF portfolio.

Against all odds

But dopamine comes with trade-offs. Think about what you’re up against when trying to successfully catch price moves and trade in and out of stocks and options. First, short-term market moves are totally unpredictable. History tells us that broad-based indexes are up just slightly more than 50 per cent of trading days.

In this regard, hindsight can play tricks on you. It’s easy to think after the fact that you knew something you didn’t. It’s called confirmation bias, which is revealed when you hear someone say, “It was obvious that was going to happen.”

Opinion: Why are these big name investing apps using the gambling playbook to lure clients?

Part of the day trading community have moved into prediction markets, which are betting platforms overseen by financial regulators. The Globe and Mail’s Meera Raman reported last week on a study that determined, “71 per cent of users lose money, while a small group of skilled traders reap more than 80 per cent of all gains.”

These stats prompt the next question: Who are you up against? Who are the sophisticated few who are making the money? Well, they would be the best and brightest money managers with more capital and computing power than a small country.

Make it work

If you decide to actively trade stocks and options, think about putting some guardrails around it.

Size it correctly – Initially, make your trading account a small portion of your overall mix, the core of which should be a low cost, diversified stock portfolio.

Measure – Don’t be like many day traders who aren’t being intellectually honest with themselves. Make sure you use the performance tab on your broker’s website or app to monitor how you’re doing. I’m not talking about the last week or month, but rather, the past few years.

Milestones – Set some markers that must be achieved before allocating more assets to your trading account. There should three hurdles at a minimum – the amount of time (measured in years), the number of full market cycles (at least one) and returns (at or above comparable indexes).

If you sense a dash of cynicism in my take on this topic, it’s because my approach to investing is all about putting the odds in my clients’ favour. Making decisions based on the unknowable, and competing against well-resourced, hard-to-beat players doesn’t fit that description.

As Warren Buffett said: “The propensity to gamble is increased by a large prize versus a small entry fee, no matter how poor the true odds may be.” I’ve met plenty of day traders who are scary smart and love what they do, but none of them have built lasting wealth from doing it.

Frequent trading causes you to miss out on the surest thing in investing, what Albert Einstein referred to as the eighth wonder of the world. The power of compounding, when growth and dividends are given time, produces excellent and reliable results. When you transact 100 or more times a year, you’re only as good as your next trade.

Tom Bradley is a portfolio manager with Purpose Investments, co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.