Stock Trade Commissions
As I mentioned in my last post on the cost of trading stocks, I pay a $10 commission for each stock trade. In most years I make between 5 and 20 trades. If I average one trade per month for 25 years, the commissions will add up to $3000 (ignoring inflation). This is low enough that it won’t have a serious impact on my returns.
My strategy for buying stocks is to guess at the future prospects of the business, determine a fair price for the stock, and compare this to the current stock price. If I buy a stock one day believing that the business will be successful, it is unlikely that something significant will happen in the first week or month that changes everything. This is why I tend to trade infrequently.
What happens if you trade more frequently than this? Suppose that day-trader Dave is playing with $10,000 and makes 2 trades a day, 5 days a week, for 50 weeks a year. (Even day traders need 2 weeks off, don’t they?) The commissions add up to $5000 per year. So, Dave needs to make a 50% return on his money just to pay the commissions and break even. I know I’m not smart enough to do this consistently. Most likely Dave will be just about out of money in a couple of years.
Some people might object to this analysis because day traders often get discounted trades. This is true. However, day traders often make more than 2 trades a day. No matter how you slice it, commissions are a huge hurdle for day traders to overcome. This explains why the majority of day traders lose their money. See this SEC article for more useful information about day trading.
All of this discussion didn’t even take into account the cost of stock spreads, which I discuss further in my next post.
My strategy for buying stocks is to guess at the future prospects of the business, determine a fair price for the stock, and compare this to the current stock price. If I buy a stock one day believing that the business will be successful, it is unlikely that something significant will happen in the first week or month that changes everything. This is why I tend to trade infrequently.
What happens if you trade more frequently than this? Suppose that day-trader Dave is playing with $10,000 and makes 2 trades a day, 5 days a week, for 50 weeks a year. (Even day traders need 2 weeks off, don’t they?) The commissions add up to $5000 per year. So, Dave needs to make a 50% return on his money just to pay the commissions and break even. I know I’m not smart enough to do this consistently. Most likely Dave will be just about out of money in a couple of years.
Some people might object to this analysis because day traders often get discounted trades. This is true. However, day traders often make more than 2 trades a day. No matter how you slice it, commissions are a huge hurdle for day traders to overcome. This explains why the majority of day traders lose their money. See this SEC article for more useful information about day trading.
All of this discussion didn’t even take into account the cost of stock spreads, which I discuss further in my next post.
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