In order to trade stocks you need a stock brokerage firm. Stock brokerage firms charge stock trading fees and commissions for buying and selling stocks on your behalf. The stock trading fees and commissions you pay depend on the type of stock broker you use, full service broker, or discount broker. You must pick your stock broker wisely because if you do not, you will soon realize that stock brokerage services cost, and in some cases more than wrong investment decisions!
Stock trading fees can accumulate quickly depending on the stock trader’s activity. Normally, transaction costs are not an issue for investors who have an investment strategy which generates a couple of trades each month. On the other hand, trading fees can be significant for active or, high frequency day traders who make several trades during the day.
Before choosing a stock brokerage firm, determine your trading style and estimate the trading frequency of your investment strategy. If your trading strategy focuses on long term investment opportunities then, stock trading fees will not be significant. In this case search for a full service brokerage firm that offers special services and support such as investment advice, equity research, and recommendations. If you are a swing trader trying to identify mid-term stock market turning points, transaction costs may be significant. For high frequency stock trading who seek investment opportunities with tight profit margins, fees and commissions are vital. Day traders should be very cautious when selecting a stock broker.
Let us assume that you choose a full service stock brokerage firm that charge approximately 1% of the nominal value of each transaction. Thus, the total fee of a complete buy and sell transaction will be about 2%. A day trader should close a position with profit over than 2% in order to make money. However, it is very difficult, if not impossible, to consistently pick such profitable trades in a daily basis.
In particular, if you start with $100,000 and trade in a monthly basis with 5% rate of return with zero commissions, you will end up after a year with approximately $180,000. If we consider a two way transaction fee of 1% you will end up with approximately $140,000. In this case you would have paid about $30,000 for stock trading fees!
In the case of a weekly trading frequency the stock broker gets much richer. If you start with $100,000 and trade profitably each week with 1.25% rate of return and zero trading fees, you will end up with approximately $190,000. However, if we consider the above transaction cost scheme, you will end up with approximately $67,000, lower than your initial capital! Obviously, there is nothing wrong with your (profitable) trading strategy. You just pay almost $85,000 in commissions!
Nowadays, high-frequency day traders rely on discount stock brokers which offer their services through the internet (online discount stock brokers). Stocks can be traded for as low as $0.5 per 100 shares. The reduction in trading fees is significant. Suppose for example that you want to trade 1000 shares of a $10 stock. The transaction cost to buy and sell this stock through the discount broker would be $50. The nominal cost of $50 implies a commission rate of 0.5%, a significant reduction from the approximate 1% charged by the full service broker. The benefits of online discount brokers for medium and high frequency traders are quite significant and result in dramatic improvements on the overall performance. Moreover, using online discount brokers, day traders can exploit high probability investment opportunities with low profit margins.
StockTradingCollege.com, Stock Trading and Investing for Beginners
Stock trading fees can accumulate quickly depending on the stock trader’s activity. Normally, transaction costs are not an issue for investors who have an investment strategy which generates a couple of trades each month. On the other hand, trading fees can be significant for active or, high frequency day traders who make several trades during the day.
Before choosing a stock brokerage firm, determine your trading style and estimate the trading frequency of your investment strategy. If your trading strategy focuses on long term investment opportunities then, stock trading fees will not be significant. In this case search for a full service brokerage firm that offers special services and support such as investment advice, equity research, and recommendations. If you are a swing trader trying to identify mid-term stock market turning points, transaction costs may be significant. For high frequency stock trading who seek investment opportunities with tight profit margins, fees and commissions are vital. Day traders should be very cautious when selecting a stock broker.
Let us assume that you choose a full service stock brokerage firm that charge approximately 1% of the nominal value of each transaction. Thus, the total fee of a complete buy and sell transaction will be about 2%. A day trader should close a position with profit over than 2% in order to make money. However, it is very difficult, if not impossible, to consistently pick such profitable trades in a daily basis.
In particular, if you start with $100,000 and trade in a monthly basis with 5% rate of return with zero commissions, you will end up after a year with approximately $180,000. If we consider a two way transaction fee of 1% you will end up with approximately $140,000. In this case you would have paid about $30,000 for stock trading fees!
In the case of a weekly trading frequency the stock broker gets much richer. If you start with $100,000 and trade profitably each week with 1.25% rate of return and zero trading fees, you will end up with approximately $190,000. However, if we consider the above transaction cost scheme, you will end up with approximately $67,000, lower than your initial capital! Obviously, there is nothing wrong with your (profitable) trading strategy. You just pay almost $85,000 in commissions!
Nowadays, high-frequency day traders rely on discount stock brokers which offer their services through the internet (online discount stock brokers). Stocks can be traded for as low as $0.5 per 100 shares. The reduction in trading fees is significant. Suppose for example that you want to trade 1000 shares of a $10 stock. The transaction cost to buy and sell this stock through the discount broker would be $50. The nominal cost of $50 implies a commission rate of 0.5%, a significant reduction from the approximate 1% charged by the full service broker. The benefits of online discount brokers for medium and high frequency traders are quite significant and result in dramatic improvements on the overall performance. Moreover, using online discount brokers, day traders can exploit high probability investment opportunities with low profit margins.
StockTradingCollege.com, Stock Trading and Investing for Beginners