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.
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.
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.