How Can You Reduce the Cost of Trading?

published Apr 28, 2021
1 min read

Cost of Trading

It can be hard to measure the full value of individual financial markets, particularly given the scale of many of these entities.

Take the global stock market, for example, which is home to multiple indexes and a raft of billion-dollar equity options. In the US alone, the total market capitalisation of the stock market is more than $49 billion, although some experts believe that the American market is grossly overvalued.

Interestingly, it’s also relatively costly to access the stock market in most instances, so as an aspiring trader you may want to consider seeking out ways of reducing these when starting out. Here are some ideas to keep in mind.

Stock Market Fees Explained – What Do You Need to Know?

In simple terms, you’ll be required to pay a stock trading fee when investing in equities, with this representing a simple trade commission per individual share or order.

This will be charged each and every time that you buy a particular stock or option, and it will correlate directly with the amount of capital that you choose to invest.

Interestingly, some brokers also charge additional fees to traders, ranging from simple order execution costs to annual and subscription fees. These can eat into your trading profits over time, particularly if you’re also required to pay capital gains tax on profits accrued from selling shares.

Now that you understand these fees in greater detail, the next step is to take practical steps to minimise them over the course of your trading journey. For example:

Use a Zero Fee Broker

This is the most obvious step, as the best-licensed brokers tend not to derive their profits from excessive fees.

In this respect, most reputable stockbrokers adopt a zero-fee approach, some of which sell retail trades to market makers through an ‘off-exchange medium. This enables you to avoid the fees associated with global exchanges such as the NYSE, reducing the cost of trading significantly in the process.

Of course, you’ll need to shop around and compare the market to identify the best zero-fee brokers, and this type of research is key if you’re to make a truly informed decision.

Consider Fixed Price Brokerage Sites

Interestingly, zero-fee brokers may still not be completely free, so you’ll have to consider the full terms of use if you’re to make a truly informed decision.

Additionally, if you’re on a per-share pricing system and find that you’re making a high volume of orders regularly, you could manage your costs more effectively through a transparent and fixed price brokerage platform.

In a fixed price system, traders get charged the same commission regardless of their activity levels and the size of their individual trades, so it offers a significant advantage to prolific or experienced investors with increased levels of capital.

Avoid Over Trading

We’ll close with a relatively simple step and one that requires you to manage your own account activity over time.

More specifically, you’ll need to ensure that you only invest a fixed amount of capital that you can afford to lose while utilising risk management tools to minimize losses in the real-time marketplace.

Remember, the trade commission you pay will increase incrementally with every single share that you buy, so capping your activity and streamlining your investment strategy will prove far more cost-effective over time.