How can a trader save on their trading costs?
An overview of the costs associated with trading
Many traders forget the fact that becoming a trader does not always mean a stash of cash. They blatantly ignore the brokerage fees, commissions and other expenses that accompany opening trading accounts as well as punctuate the investor experience.
The truth is, you can't avoid brokerage
fees and commissions. They are part and parcel of the trading industry. What
can be achieved is balancing these fees and ensuring as a trader you are
educated about investments you have made and ensure your profits aren't eaten
up by such costs.
What fees are out there?
Prior to cutting on costs, its integral to
understand what fees are charged and how they vary from broker to broker. There
is also a forex
spread calculator that does the work factoring in below.
A brokerage fee is the most common charge
seen not only across the financial industry, but seemingly across all
organisations that manage and facilitate assets on behalf of others. This fee
is charged mostly for maintenance of a customers account, some brokers charge a
percentage of the funds held in the trading account whilst others might charge
a flat fee.
Many brokers charge their clients commissions in order to use the services and platforms they provide. The commissions charged on trades can vary depending on the broker. Brokerage firms will generally charge commissions upon execution of an order. An example of a commission is as follows:
Commission on a US share is 3 US cents, this is subject to a commission charged at a minimum of $10 USD.
So, 1000-unit trade in a company at the price of $90 incurs a commission of: $30 based on the following calculation:
1000 (units) x $0.03 (commission charged) = $30 USD.
If the trade was for only 200 units, the commission charged would be $6 USD. However, because the minimum amount of commission charged stands at $10, the full charge will be applied. Commission charged by brokers also varies on the currency being traded.
The way brokerage firms calculating how to
charge fees, is to their discretion. Some might charge low commissions as the
level of support provided is not high relative to their competitors.
The question then becomes, how does one keep their expenses down?
New brokerage firms have adopted the approach of reducing commissions and brokerage fees, on the basis that it is a mechanism that allows them to attract new traders. This might be an innovative way in reducing fees.
Another pathway traders can take in order
to ascertain what broker is the right fit for their trading habits is by
understanding exactly what the different fees mean and how they operate. By
doing so, traders will be able to tailor their habits to the broker which
matches them the best, whilst acknowledging that the fees they pay are
appropriate and suited to the investment strategy. A glossary on the types of
fees that brokers charge can be found on the various broker websites such as Wikipedia.