Do Online Brokerage Fees Eat into Your Stock Trading Profit?

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Man with Money Online Brokerage Services, Commission and Fees

With online brokerage commissions ranging from “free” to over $10 per trade, it’s important to understand the impact that the commission has on your overall stock portfolio performance. Especially if you're starting with a smaller capital amount, fees are important to consider.

A discount brokerage commission of $9.99 per trade doesn’t seem like a lot but when you compare it to a $4 to $5 commission per trade like the broker TradeKing.com () offers, there’s a big difference. If you haven't heard of TradeKing, you should take a look. A broker that charges a commission of $9.99 is over 100% more than a $4.95 commission fee!

For easy math, let’s say you have $10,000 in your stock trading portfolio. You have determined based on your position sizing strategy, that you are going to use $1,000 per trade with a broker that charges $9.99 per trade (I've rounded up to $10 for easy math). Take a look:

$20.00 in Commissions (initial entry and exit) / $1,000 = 2%

Before the stock goes in any direction that stock has to gain 2% for you just to be even. Keep in mind also, that if the stock goes down immediately after you purchase it and it stops out at 10%, your loss is really 12%.

If you scale into a stock two or more times, the commissions will eat away at your profit even more.

$30.00 in Commissions (initial entry, second purchase and exit)

/ $1,000 = 3%

Let’s also say that you are going to trade five times a week. Multiply that times 52 weeks in a year.

5 trades a week = $50.00 a week

52 weeks x $50.00 = $2,600.00 a year

If online brokerage commissions are $2,600 a year and the value of your portfolio is $10,000 that means you have to earn an annual profit of 26% just to break even. That just doesn’t work for a $10,000 or smaller portfolio!

What’s the solution? A bit of research about online brokerages will serve you well. A few questions you should ask yourself when comparing online brokerage commissions and fees are:

  • What are the commission rates and other fees?
    • Do you transfer money around and are there fees for that?
  • What services or tools do I use?
    • Do I need to occasionally consult with an investment advisor?
    • Do I use my broker’s site for back testing or analyzing stocks?
    • Do I use “streaming” tools?
  • If I subscribe to a chart service or other website, what tools are available through them?
    • Does the chart service have a scan program?
    • Do they offer educational resources?
    • Do they have a constructive forum?
  • What learning opportunities does my broker offer on an ongoing basis?
    • Do I attend the free webinars or webcasts?

Basically, think about whether you use the broker's tools to find stock trading candidates, what services you use and how you move your money around. You may also be surprised by the tools and services that the lower priced brokerages are offering in order to be competitive.

If a broker that offers $4.50 trades suits your needs, take a look at the expense difference given the criteria in the example portfolio from above:

$10,000 Portfolio

One $1,000 trade at $4.50 = 0.0045%

5 trades at $4.50 = $22.50 a week

52 weeks x $22.50 = $1,170.00 a year

That’s a 11.7% expense instead of 26%. Big difference!

Also remember, if you aren't satisfied with your current broker, you can move your stocks or cash out and move to another brokerage.

As you can see, just a bit of due diligence will go a long way toward Stock Trading Warrior success and online brokerage fees are just part of a complete money management strategy.


Move on to the next step of money management - How Much Do I Invest in Any One Stock?

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