How do I keep commissions and fees from eating trading profits?
You've been working hard for your money. And you should be able to keep as much of it as possible in your pocket. But if you're thinking of investing your hard-earned money to increase your bottom line, there are a few things you should keep in mind. Investment has a cost. There is definitely a risk that can wipe out your profits. But another thing that can fall in the end result is the cost - from fees to commissions. And it can add everything. Can you really put your money away and keep your expenses low? The short answer is yes. Read on to learn more about how to prevent these costs from exhausting your earnings.
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Investment expenses include brokerage fees, commissions, administrative and advisory fees.
Commissions and fees are not universal - they vary from company to company.
Keep your expenses low by investing with a brokerage firm or trading house without fees.
Robo consultants use algorithms to manage portfolios, so they may come with low or no fees.
Types of Investment Fees
Most investments come with some kind of fee. It's one of the only ways banks and other businesses can make money. By charging you, these institutions can continue to operate and provide their services to you. Even the simplest investment vehicle comes with some form of service charge. Most savings accounts, for example, charge if you don't maintain the minimum balance and will incur a service fee if you make more than one withdrawal per month. It's your money, so why charge a fee? The account, after all, is intended for you to save your money.
This principle of charging fees is largely consistent across the board. Companies charge money in order to maintain and deal with your accounts. But they also do the same when you want to transfer your money. Sometimes, you may feel like you're paying more than you're investing. Sure, there must be a way to reduce this, right? Of course there is. But before we decide how you can keep your money in your account by not paying hefty fees, here's a quick look at some of the most common expenses that come with investing.
Brokerage Fees
Brokerage fees are charged by many different financial services companies including brokerages, real estate houses, and financial institutions. These fees are usually charged annually to maintain client accounts, pay for any research and/or subscriptions, or to access any investment platforms. These fees may also cover cases if and when the account becomes dormant. The brokerage fee may be a certain percentage of the balance held in the client's account or a fixed fee.
Commissions
Brokers and investment advisors often charge commissions from clients for using their services. These are also called trading fees. They basically pay for any investment advice or for executing orders to buy or sell securities including shares. Commodities, options or exchange-traded funds (ETFs). Commission fees vary from company to company, so it's important to check the brokerage fee schedule before you decide to use their services.
Management or consulting fees
Companies that manage investment funds charge management or consulting fees. Fund managers are compensated with these fees for their expertise. Although they can vary between funds, most of these fees are based on a percentage of assets under management (AUM) in each fund.
Basics of trading expenses
There is no universal system regarding trading commissions or other fees charged by brokerage firms and other investment houses. Some charge a fairly high fee per trade, while others charge very little, depending on the level of service they provide. A discounted brokerage company may charge as little as $10 for trading common stock or even less, while a full-service broker may easily charge $100 or more per trade.
The fees vary from company to company – some are quite expensive, while others are fairly cheap.
So, the amount you pay has more to do with the amount of money you invest in each trade than the number of times you trade. If you only have $1,000 to invest in a trade and you use a discount broker that charges $20 per trade, 2% of your trade value is depreciated by commission fees when you first enter your position. When you ultimately decide to close your trade, you'll likely pay another $20 commission fee, which means the round-trip cost of the trade is $40, or 4% of your initial cash amount. This means that you will need to earn at least 4% return on your trade before you reach breakeven and can start making profits.
With this type of fee structure, which is very common, it doesn't really matter how often you trade. All that matters is that your trades make enough profit to cover your commission costs. However, there is one caveat – some brokerages offer commission discounts to investors who make several trades. For example, a brokerage company may charge $20 per trade from its regular clients, but it may only charge $10 per trade for clients who make 50 or more trades per month.
In other cases, investors and brokers may agree to a fixed annual fee. Since you pay the same percentage of annual fees, it doesn't really matter how often you trade.
Keep your expenses low
Although fees are an integral part of the financial system, you don't need to owe them. There is a way you can cut your expenses and continue investing.
Consider investing your money with a company that doesn't charge any commissions or fees on trading stocks and ETFs. More companies – especially small businesses and those new to the game – are embracing this structure to attract and retain customers. Some of these companies also waive the minimum deposit requirement, so you can start with a low balance at no extra cost. However, you'll want to check their fee structure for other investment instruments along with any other fees they might charge to see if they balance.
Robo-investment platforms may also help reduce your expenses. Robot advisors are a relatively new trend in the financial industry and can be great for small investors because their fees are low. This means more money in your pocket. They can afford to do this because it's automated, so they don't have anyone who actually manages customer accounts. Instead, robotics consultants use algorithms to maintain and reallocate your property according to your risk tolerance and investment goals.
Reducing commissions and fees can have a huge impact on your investment career. Here are three ways to do it:
- Invest in exchange-traded funds (ETFs) instead of mutual funds. Expense ratios are always lower for ETFs versus a similar mutual fund. It is now very easy to create a low-cost and well-diversified portfolio using ETFs with an expense ratio of 0.25% or less per annum.
- Avoid products with front loads, rear loading, or 12B-1 charges. These are usually found in mutual funds, but not ETFs.
- Look for ETFs with no trading fees. An increasing number of fund families are waiving trading fees on their ETFs.
- If you decide to invest in a fund with trading fees, try investing more than $1,000 per fund.