Day 11: Don’t Go Under Because of Transaction Costs

No one likes transaction costs, but it’s how brokers, the exchanges, and other service providers stay in business. Still, we should focus on minimizing transaction costs because each time we buy and sell something for a profit, the transaction cost takes some of our profit. Each time we sell something for a loss, add the transaction cost to that loss for a bigger loss.  Transaction costs is more of an issue for active traders and beginning investors.  For beginning investors, I suggest finding brokers with low commissions.  You can find brokers with commissions under $5.  If you're only investing a few hundred dollars and commissions add up to $20 or more, you can't make much money.

Commissions. The main transaction cost everyone has to deal with is commissions. Each time you buy and sell, you pay a commission. I wrote about the many services and technology brokers now provide. The cost for having these features, along with other fees, are bundled together in commissions. In essence, the more you use a broker’s services to make trades, the more you pay by paying more in commissions. If you trade directly through the web, lower commissions. If you need the assistance of a live broker to help you make trades, you’ll pay even higher commissions (to pay the live broker’s salary).

Bid Ask Spread.  Thinking back to Day 10's lesson, everyone in the market is either a buyer or a seller.  Obviously the seller wants to sell for the highest asking price while the buyer wants to pay the lowest price with their bid.  The difference in the sellers asking price and the buyer's bid price is the Bid Ask Spread.  In non-liquid markets, including some forex (currency) markets and pennystocks, the Bid Ask Spread may be huge.  If you aren't careful, you could very well buy at the higher Ask price and pay several % more than you wanted.  That means you'll need to the stock to go up that much more just to make a profit.  Same with selling.  If you sell at the lower bid price, for a non-liquid market you may sell at prices several % lower, either losing all your profit or taking a loss.  This usually happens if you use market orders when placing your trade.  Market orders are the fastest and make your trade at whatever prices are available.  To make sure you get the prices you want, use limit orders and stop loss orders with which you can enter specific prices.

Load and No Load Mutual Funds. Some mutual funds and other types of funds also have transaction costs, which you’ll pay on top of the commissions paid to the broker. Mutual funds may charge a fee each time you buy or sell some shares in the mutual fund. This is to discourage investors from actively trading a fund, putting money in and taking money out of the fund, making it hard for the fund manager to know how much money they have to work with. Fees for mutual funds are labeled as “loads.” Thus, funds marked as “no load” means there’s no extra cost to buying or selling the fund. With load funds, you’ll have less money invested from the start because a percentage of the money you invested already paid for the transaction cost, or load.

Taxes. Didn’t think taxes was in here? Taxes aren’t a direct transaction cost, but each time you sell for a profit when your investments are positive for the year, you’ll pay taxes. Taxes won’t add to your losses, but taxes definitely cuts in to your take-home pay.

The moral of this lesson:

Don’t let transaction costs eat away all your profits. Don't let transaction costs become a pile of losses.

Many people make the mistake of making many trades for small profits, only enough to pay for commissions. Those people do a lot of work but end up making little to nothing. Only the brokers made money from commissions. Transaction costs are very real and you must account for it in your investment plan and trading plan. If an opportunity may not even cover the transaction costs, it’s not worth pursuing. The upside for this awareness is you’ll start to look for the best opportunities with the highest payout probability. Don’t waste time on mediocre opportunities. Also, be smart and choose a broker with the right services for you. You don’t want to pay high commissions for a lot of features you don’t need.

Beginner 0 Users Collected

Post Topics

Post Details

Market Merchandise: Preferred Stock, Commodities, Currency (Forex), Municipal Bond, Corporate Bond, Bond, Mutual Fund, ETN (Exchange Traded Notes), ETF (Exchange Traded Fund), Futures, Options, Stock,
Players: Exchange, Broker-Dealer, Investment Bank, Market Maker,
Styles: Trading, High Frequency Trading, Active Investing, Investing, Swing Trading, Scalping,

Download Our Free eBook

25 Stock Market Indicators To Know

And subscribe to our MarketHeist Guides newsletter!

Free Brokers, Software, & Tools to Start.

Start with Brokers that have free accounts and professional grade software. Software that's the same whether you're practicing with fake money or trading real money.

Submit a Service

Profile Photo

TD Ameritrade Online Broker

With free thinkorswim, Trade Architect, & mobile software. Practice with virtual money. Invest and trade in stocks, ETFs, mutual funds, bonds, options, futures, and forex. No minimum and no maintenance fees. $0 to start.

☆ Collect Launch

Profile Photo

tradeMONSTER Online Broker

Free browser & mobile software. Easy to use technology including strategySeek and paperTRADE. Invest and trade in stocks, ETFs, mutual funds, bonds, and options. No minimum and no maintenance fees. $0 to start.

☆ Collect Launch

Profile Photo

optionsXpress Online Broker

optionsXpress offers an innovative suite of online brokerage services for investor education, strategy evaluation and trade execution. No minimum requirements.

☆ Collect Launch

Learn The Business. Take A Course.

What is the market and how it works
Finding Opportunities (with Technical Analysis & Fundamental Analysis)
Planning & Safety (with strategies to make smart decisions.)
Plan Execution: Buying & Selling

Submit a Service

Learn Stocks

Profile Photo

Investools Investing Foundations Program

Get trained in the foundations of the stock market and stock trading with two courses, a wealth of easy-to-use tools, and top-tier coaching support, in the program that helps you start managing your own portfolio. In the Investing Foundation Program, you’ll enjoy live and online workshops that can help you quickly overcome fears and learn […]

☆ Collect Launch

Learn Options

Profile Photo

OptionsAnimal Apprentice Options Education Program

Description Build your knowledge from the ground up. Understand key concepts and learn the basic spread trades that will give you a foundation to trade successfully. Learn how to properly structure a trade using the Protective Put, Covered Call, Collar Trade as well as applying the Straddle/Strangle. Trade Adjustment Spread Trades OptionsAnimal Trader Professional Program […]

☆ Collect Launch

Learn Futures

Profile Photo

OpenTrader Professional Training Program

The industry’s only training program built by professional full-time traders. You used to have to get hired by a professional trading firm to get world-class training. Not anymore. If you’ve been a losing trader, getting beaten down by the market again and again, low on confidence and full of doubt, things are about to change […]

☆ Collect Launch

On-The-Job Training. Earn While Learning.

Follow Live Trades, Step By Step
Detailed Trade and Market Analysis
Explanations of Strategies and Tactics
Questions Answered in Webcasts & Chatrooms
Learn by Copying The Pros At Every Step

Submit a Service

Learn Stocks

Profile Photo

Mish’s Market Minute Premium Stock Picks Video Subscription

Live-in-the-market instruction showing you how to trade in the afternoon the choice stock and ETF picks vetted by MarketGauge’s tools earlier in the day. Video up to 15 minutes: 4 times a week (M/T/W/Th) by 1:30PM ET $124.97/month Includes ETF Monitor & Nuggets List Private real-time Twitter Alerts 2 week FREE trial Learn as Mish: […]

☆ Collect Launch

Learn Options

Profile Photo

stockguy22 Live Trading & Education for Part Time Traders

What You’ll Get Learn stocks and options trading at your own pace from a group of full time traders dedicated to teaching through live trading, education, and mentoring.  See how trading is done methodologically as an occupation on a daily basis, from beginning to end.  Start with the daily in-depth analysis of stocks, the overall […]

☆ Collect Launch

Learn Futures

Profile Photo

Emini Wizard Trading System & Live Trading Chat Room

Thanks for considering The Emini Wizard System: This system is available for purchase for people who want to make a one time investment for the entire program. You get: Access to the Member’s website Spreadsheets Common plays Special plays Trade logic explained Chart patterns Chart settings we prefer Separate active chat area (30 days free […]

☆ Collect Launch

Some Partners We've Worked With

  • Download Our Free eBook

    25 Stock Market Indicators To Know

    And subscribe to our MarketHeist Guides newsletter!