Tips For Cutting Down On Trading Fees
While most beginner investors may not realize it, commissions and trading fees can eat away their returns. Depending on whethery ou invest in stocks, mutual funds, or ETFs, various types of fees may hinder your returns.
Mutual funds almost always charge a percentage of a client’s assets in the fund. This percentage generally has nothing to do with how much a client has. Someone with $10,000 invested pays the same percentage as someone with $1 million. Therefore, for mutual funds, it’s just a matter of finding one that charges low fees. Make sure you don’t pay a load when you buy a mutual fund, and investigate its total management fees. It’s best to find funds that have a total fee of 1.1% or less.
Stocks are different though. For stocks, you pay a flat fee each time you trade. Generally, this amount is per trade, no matter how many shares are bought or sold. Most online brokers charge between $7-$15 per trade. For people with large asset bases ($1 million or more), trading often isn’t a big deal, as the fees represent a small percentage of their total assets. However, most people need to attempt to keep their trading costs down.
For example, if you have $20,000 in the market and pay $10 a trade, making just two trades a week would cost about $1000 a year. This is 5% of your assets, which is quite a lot. Considering the market returns on average about 10% a year, you are blowing half your money in trading fees. For someone with this amount of money in the market, you should either trade less often (perhaps buy some ETFs) or consider mutual funds.
Perhaps the most important tip for everyone is to use the Internet to make trades. While all investment decisions are ultimately the responsible of the investor, trading on the Internet costs much less than making trades via the phone. For the same trade that you can make on the Internet for $9, you could easily end up paying $50 or more if you use the phone. If you think it’s appropriate for yourself to make Internet trades, consider using this method instead of calling your broker to make the trades.