Whether you like to dabble in trading stocks or make a living as a day trader, the cost of doing business in the form of fees can add up. Fees have a way of eating into your profits on seemingly good deals and can make a bad deal even worse. Trading fees are a necessary evil in the world of trading, but do they have to be? Here are four ways to reduce your trading fees.
1. Decide Between Per-Share and Fixed Price
Most major brokers default to the fixed price model, which means that you get charged the same amount for a $20,000 trade as you would for a $100,000 trade. The per-share pricing model charges a fee per share, making a large move much more expensive. This model works well for those who are dabbling in the market or don’t have a large portfolio.
If you’re just starting out with a small amount of money, consider using the per-share model, and if you want to try your hand in larger trades, move to a fixed price.
2. Don’t Overtrade
One of the biggest mistakes investors make is overtrading. Every single time you make a transaction, you need to pay a fee. If you try to recoup for a loss by selling off the stocks and buying new stocks over and over, you might end paying more in fees than what you lost in the first place. Many experienced investors cut ties with stocks that take a big hit and aren’t likely to bounce back. On the other hand, if it’s possible that the stock has a chance to recover, an investor can hold it long term to see what happens.
3. Look for Passively Managed Funds
When considering a mutual or index fund, you should always look at how they are managed. Actively managed funds have a manager who manually trades to produce a profit, resulting in higher fees. Passively managed funds are set up to mimic an index, like the S&P 500, without a manager, so there are fewer fees. Robo-advisers are becoming a common option for many investors. This technology uses algorithms to automatically invest in a variety of funds at a percentage of the cost of human advisers.
4. Choose a Zero-Commission Broker
The best solution is to choose a zero-commission broker. More trading websites are offering this pricing model than ever before. If your current broker is charging a commission, don’t be afraid to ask for a zero-fee plan, or start shopping around for a website that automatically includes a commission-free model. Keep in mind that some fees could still apply to your trades depending on the brokerage. Check different brokerage websites to see which ones offer the lowest fees and commissions overall.
In most cases, trading fees are unavoidable. However, when you do a little research and create an investment strategy, you can lower the amount you pay in fees for each transaction and also in the long run.
