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How Do I Keep Commissions and Fees From Eating Trading Profits?

You work hard for your money and want to make it grow. But investing can come with costs…
How Do I Keep Commissions And Fees From Eating Trading Profits?

You work hard for your money and want to make it grow. But investing can come with costs that eat into your profits. From fees to commissions, these expenses can add up over time. However, there are ways to keep these costs low while growing your wealth. Read on to discover how to protect your profits from being eaten away by investment expenses.

KEY TAKEAWAYS

  • Investment expenses cover brokerage fees, commissions, and management and advisory fees.
  • Commissions and fees differ between firms and aren’t the same for everyone.
  • Save on costs by investing with a brokerage firm or trading platform that doesn’t charge fees.
  • Robo-advisors use computer programs to handle portfolios; some may have minimal or zero fees.

Types of Investment Fees

Nearly all investments involve fees, as banks and firms need to make money to sustain their operations and provide services. Even basic investment options like savings accounts often come with fees, such as charges for not maintaining a minimum balance or making frequent withdrawals. While it might seem unfair to be charged fees on your own money, these charges are necessary for the institutions to continue offering their services.

The practice of charging fees is quite common in the business world, especially when it comes to managing your accounts and transferring money. Sometimes, it might feel like you’re spending more on fees than investing your money. However, there are ways to minimize these costs. But before we delve into how to avoid excessive fees, let’s briefly examine some typical investment expenses.

Brokerage Fee

Various financial services companies, such as brokerage firms and financial institutions, impose a brokerage fee. Clients usually pay an annual fee to keep their accounts active and cover expenses like research tools and access to investment platforms. These fees may also apply if an account becomes inactive. Brokerage fees can be a percentage of the account balance or a flat rate.

Commissions

Brokers and investment advisors sometimes ask clients to pay commissions and trading fees for their services. These fees cover investment advice and carrying out orders for buying or selling securities such as stocks, commodities, options, or exchange-traded funds (ETFs). The amount of commission can differ from one firm to another, so it’s crucial to check a brokerage’s fee list before choosing to work with them.

Management or Advisory Fees

Companies that manage investment funds charge management or advisory fees to cover expenses and compensate fund managers for their expertise. These fees are usually a percentage of each fund’s assets under management (AUM). While the exact fees may differ among funds, this is how fund managers are typically paid for their services.

The Basics of Trading Expenses

Different brokerage firms and investment houses have varying systems for charging trading commissions and other fees. Some charge high fees for each trade, while others charge much less, depending on the level of service they offer. For example, a discount brokerage firm might charge around $10 for a common stock trade, while a full-service broker could charge $100 or more for the same trade.

Important: Fees differ between firms—some are high, while others are low-cost.

The amount you pay for trading depends more on how much money you invest in each trade than how often you trade. For example, if you’re investing $1,000 with a discount broker that charges $20 per trade, the commission fee eats up 2% of your trade’s value when you start. When you close the trade, you’ll likely pay another $20 fee, making the total cost $40 or 4% of your initial investment. This means you need to earn at least a 4% return on your trade to break even and start making a profit.

In this fee setup, how frequently you trade doesn’t matter much. The important thing is that your trades earn enough to cover the commission fees. But there’s a catch—some brokerages offer discounts on commissions to customers who make a lot of trades. For instance, they might charge $20 per trade for regular customers but only $10 for those who make 50 or more monthly.

In some situations, investors and brokers might decide on a fixed annual percentage fee. Since this fee is paid yearly, it doesn’t matter how many trades you make.

Keep Your Expenses Down

While fees are a normal part of finance, you can still control them and keep your expenses low while investing.

Think about investing with a company that doesn’t charge fees or commissions for trading stocks and ETFs. Many firms, especially smaller ones, and new players are moving to this model to attract and keep customers. Some companies even let you start with a small balance without extra charges. But check if they charge fees for other types of investments or any additional fees so you can weigh the pros and cons.

ADVISOR INSIGHT

Dave Rowan, CFP®

Rowan Financial LLC, Bethlehem, PA (Rewrite in simple language that is SEO-friendly and has no plagiarism)

Reducing commissions and fees can greatly benefit your investing journey. Here are three methods to accomplish this:

1. Choose exchange-traded funds (ETFs) over mutual funds for your investments. ETFs usually have lower expense ratios compared to similar mutual funds. You can now easily create a cost-effective and diversified portfolio using ETFs with an expense ratio of 0.25% or less per year.

2. Clear investments with front-end, back-end, or 12b-1 fees. These fees are commonly associated with mutual funds but are not typically found in ETFs.

3. Look for ETFs that don’t charge trading fees. Many fund families are now offering their ETFs without trading fees.

If you choose a fund with a trading fee, aim to invest more than $1,000 in each fund.

FAQs

1. How Can I Invest Without Paying Fees?

Ans: Today, there are many options for investing without paying fees. Many brokerage firms, such as E*Trade and Charles Schwab, don’t charge investors for trading stocks, ETFs, and mutual funds. You can create an account with these brokerages, deposit money, and start trading these securities without incurring fees. They charge fees for other securities, such as futures, options, and bonds.

2. How Do Investors Pay No Taxes?

Ans: There are some legal methods to avoid paying taxes on investments. For example, Roth IRAs are funded with after-tax money, and when you are legally allowed to withdraw, you will not pay taxes on the contributions or the earnings. You can also use capital losses to offset ordinary income and reduce taxes.

3. What Are Commissions in Investing?

Ans: Commissions are charges made by an investment professional for buying or selling securities for you. They are to compensate the professional for their work. Commissions are usually a set percentage of the value of the investments traded.

The Bottom Line

Remember, trading commissions and fees can eat into your investment returns. For instance, if you’re investing $10,000 and the trading commission is 1%, you’re already starting with $100 less. That’s why keeping them as low as possible is so important. If you’re primarily involved in buying and selling stocks, ETFs, and mutual funds, you’re in a good position, as most brokerages now offer these services without charging any fees.

If your trading strategy involves securities that incur fees, such as futures and bonds, devising a strategic plan to minimize these costs is essential. This approach will not only empower you to maintain control over your investment expenses but also motivate you to take action to maximize your potential returns.

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