How can I prevent commissions and fees from eating up my trading profits?

By Chris Gallant AAA
A:

First off, understand that there is no universal system regarding trading commissions charged by brokerage firms. Some charge rather steep fees for each trade, while others charge very little, depending on the level of service they provide. A discount brokerage firm might charge as little as $10 for a common stock trade or even less, while a full-service broker might easily charge $100 or more per trade.

In these cases, the answer to this question actually has more to do with the amount of money you invest in each trade than it does with how often you trade. If, for example, you only have $1,000 to invest in a trade and you're using a discount broker that charges $20 per trade, 2% of the value of your trade is eaten away by the commission fee when you first enter your position. When you eventually decide to close out of your trade, you will likely pay another $20 commission fee, which means that the round-trip cost of the trade is $40, or 4% of your initial cash amount. That means that you will need to earn at least a 4% return on your trade before you break even and can begin to make a profit.

With this type of fee structure, which is quite common, it really does not matter how often you trade. All that matters is that your trades make enough of a percentage gain to cover the costs of your commission fees. However, there is one caveat to this - some brokerage firms give commission discounts to investors who make many trades. For example, a brokerage firm may charge $20 per trade for its regular customers, but for customers who make 50 trades or more per month, they may only charge $10 per trade.

In other cases, an investor and his or her broker may agree to a fixed annual percentage fee (e.g. an annual fee of 2% of assets under management). In this case, it really does not matter how often you trade because you'll pay the same annual percentage fee.

To learn more about commission fees and their impact on your investment returns, check out Paying Your Investment Advisor - Fees Or Commissions?

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