7 Common Trading Mistakes Part 4: Trading Cost Blindness
When trading in search of dollars, it is a mistake to ignore wasting even only a few cents on trading costs. Consider an investor who buys 500 shares of a stock at $10.00 each and then turns around and sells the stock for $10.10. The investor seems to pick up a $50 profit (500 shares times 10 cents profit per share). But that does not include commissions and SEC fees – which even using a discount broker would typically trim that profit by about $12 to being a net profit of only $38. Further, the investor likely bought at the asked price and sold at the bid price – which cost the investor perhaps another 1-3 cents per share. The point is this, without fees and bid-asked price spreads, the investor could have made perhaps $55. but the investor ended up with about $38. That is a 34 basis point opportunity cost ($17 less profit on $5,000).
It simply makes no sense to be giving up 34 basis points on each trade. Wall Street pays those huge salaries, maintains those expensive buildings, and pays out huge profits to its owners mostly from trading costs paid by anxious traders and overactive traders.
Long term buy-and-hold positions in ultra-low-cost mutual funds is the way to build a long-term future. With those funds a buy-and-hold investor can earn up to ten years of returns before giving up those 34 basis points to fees and other costs!