Like a unicorn or Shangri La, the true picture of the smart investor is sometimes hard to define. It's true that some people are lucky but, by and large, most people who are successful in the market do their homework and analyze the stocks, period. Regardless of what kind of investor you are or want to be, there is one practical lesson that can help you maximize your returns: a penny saved is a penny earned. That is why smart investors will ensure that they don't give away more money than necessary to their brokerages.

Surprising Extras
Some brokerage firms will try to find any way to get you. In the times of competitive markets and low commissions, individual investors should ask themselves how brokers make their money. Large corporations are under constant pressure to help improve the bottom line, and as a result they have introduced new types of fees for individual investors. It is important to read over your account agreement and fee summaries to make sure that none of these fees takes you by surprise. Here are some to look out for:

  • Inactivity fees – These you have to pay if you don't execute enough trades on your account during a set time frame.
  • Transfer fees – These fees are meant to discourage you from jumping around from broker to broker.
  • Account maintenance fees – These fees are placed on certain services, and are designed to reduce customer requests that require tasks that expend the broker's resources, such as searching for historical data, maintaining records and mailing statements.
  • Minimum equity requirement fees - Some brokerages charge clients who don't maintain a minimum balance, which can consist of cash and/or securities.

Although these fees are not broadcast when you first open an account, they can, after a couple months, cause significant damage to you portfolio.

For instance, by missing your minimum equity requirements you can be charged close to $20 every quarter. This sum might not seem very large, but $80 a year adds up to the equivalent of a $1,000 bond paying 8% interest. Some of these charges are easy to avoid, but you need to be aware of them. If your brokerage account balance is below the equity requirements and you are carrying balances not being used for anything in other accounts, all you have to do is transfer them over for the duration.

Not All Orders Are the Same
You may or may not be aware that most discount brokerages charge a different price for limit orders than for market orders. A market order is an order to buy or sell a stock immediately at the best available price. A limit order is an order placed with a brokerage to buy or sell at a specific price. Placing a limit order with some brokers can cost as much as $5 more than a market order. If you use a limit order, make sure the price you pay more than offsets the extra $5 you will be charged on the commission. (Using limit orders can be an important way to protects your assets. See Protect Yourself From Market Loss.)


Discipline Is Key to Reducing Commissions

The two emotions that strongly characterize the financial markets are fear and greed. Keeping your emotions out of your portfolio could end up saving you a lot of money. Before you make hasty buy or sell decisions remember that there are commissions charged on both sides of the transaction. For example, if we assume that the commission related to an order is $15 per side, a trade that will allow us to crystallize a gain will cost $30 (one buy and one sell order).

Warren Buffett, one of the greatest investors of all time, suggests a hypothetical strategy: every investor is given a punch card with 20 slots, and, each time the investor buys a stock, a slot is punched out. Once all 20 slots are punched out, the investor is done investing for the remainder of his or her life. Using a similar guideline would help many of us not only save thousands of dollars in commission throughout our lifetime but also choose our investments much more carefully. (For more of Buffett's wisdom, read What Is Warren Buffett's Investing Style?)

Don't Forget About Potential Returns
One additional thing to remember is that money that is not working for you is money wasted. You work hard for your money, but by letting it sit in a checking account, you earn only meager interest. So spending some money on commissions is necessary to put your money work for you. If, on the other hand, you have large sums of money that is not invested, one of your options is to buy a money market fund or open a money market account with your bank. A money market account is a savings account that offers the competitive rate of interest in exchange for larger-than-normal deposits.

Conclusion
These tips might not make you $1 million dollars, but they may be necessary in your aim to maximize your investment income. By being aware of the extra fees out there, you can reduce transaction costs and increase returns on your investments.

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Investing

    Automating Your 401(k) is Easier Than You Think

    If you like automation, you should check out these features that many 401(k) plans offer.
  3. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  4. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  5. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  6. Mutual Funds & ETFs

    5 Mutual Funds that Hold Berkshire Hathaway Stock

    Discover the top five mutual funds most heavily weighted with Berkshire Hathaway stock, and the percentage of their assets dedicated to BRK.
  7. Mutual Funds & ETFs

    3 Mutual Funds that Hold Google Stock

    Discover the top three mutual funds that dedicate the largest percentage of their total assets to Google, Inc. stock.
  8. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  9. Mutual Funds & ETFs

    4 Mutual Funds that Hold Tesla Stock

    Obtain information on the four mutual funds that have significant allocations to Tesla Motors, Inc. in their major portfolio holdings.
  10. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Theta

    A measure of the rate of decline in the value of an option due ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
RELATED FAQS
  1. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  2. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  5. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  6. How do I use the holding period return yield to evaluate my bond portfolio?

    The holding period return yield formula can be used to compare the yields of different bonds in your portfolio over a given ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!