After putting forth a lot of effort to earn money, you should be able to keep as much of it as possible in your pocket.
However, if you’re considering investing your hard-earned money to boost your net worth, there are a few things to consider.
Successful investing comes with a price tag. There are a lot of trading expenses which can eat into your profits.
The most obvious trading expenses that investors and traders are likely to incur are fees and commissions. So, are you able to save money while keeping your spending low? Yes, to put it succinctly. Let’s look at how to keep these expenses from draining your profits.
What are trading expenses?
Trading commissions and other fees levied by brokerage firms and other investment houses are not uniform or cast in stone.
Depending on the amount of service they give, some charge quite high fees for each trade, while others charge relatively little.
A brokerage may charge as low as $10 or even less for a common stock trade, but a full-service broker may charge as much as $100 or more. Despite the disparities in fees, there are common expenses that come with investing no matter the broker or platform that you use. Let’s have a look at them.
1. Brokerage Fee
Financial services providers, such as brokerage firms, real estate houses, and financial institutions, usually impose a brokerage fee on their clients for services rendered.
This cost is usually collected once a year to keep client accounts up to date, pay for research and/or subscriptions, or gain access to investment platforms. These charges may also apply if and when an account becomes dormant.
Brokerage fees can be based on a percentage of a client’s account balance or a flat fee.
2. Commissions
Clients are frequently charged commissions by brokers and investment advisors.
These are also known as trade commissions. They essentially pay for any financial advice or to have orders for the sale or purchase of securities, such as stocks, commodities, options, or exchange-traded funds (ETFs).
Because commission rates differ from company to firm, it’s critical to check a brokerage’s cost schedule before deciding to use their services.
Read more about ETFs: Wondering About ETFs? The Top 10 Questions About Exchange Traded Funds Answered
3. Management or Advisory Fees
Companies that manage investment funds charge management or advisory fees.
These fees are paid to fund managers in exchange for their expertise. Although fees among funds may vary, the majority of them are based on a proportion of each fund’s assets under management (AUM).
6 ways to invest without paying a lot of fees
This practice of charging a fee is pretty consistent across the board. Businesses charge you money in order to keep and handle your accounts. But they also do the same when you want to move your money around. At times, you may feel like you’re paying more than you’re investing because every dollar you pay in fees is one that can’t generate compounding returns.
Here’s how you can keep your fees to a minimum
1. Keep your expenses down
Even though fees are an unavoidable element of the financial system, you are not obligated to pay them. There is a way for you to save money while still investing.
Consider investing with a company that doesn’t charge commissions or fees on stock and ETF trading.
This structure is being adopted by a growing number of businesses, particularly small businesses and those that are new to the game. Some of these companies will waive the minimum deposit requirement, allowing you to start with a small balance at no extra charge. You should, however, compare their cost structure to that of other investment vehicles, as well as any extra fees they may collect, to determine if it all adds up.
2. Automate your investments
Investing platforms that are automated may be able to help you save money. Because of their low fees, Robo-advisors are a relatively recent trend in the financial business that can be beneficial to small investors. You’ll have the extra money in your pocket as a result of this.
Because they’re automated, they can afford to do so because no one is physically maintaining customer accounts. Instead, Robo-advisors employ algorithms to keep track of your assets and reallocate them based on your risk tolerance and investing objectives.
3. Invest in exchange-traded funds (ETFs)
The expense ratios are almost always lower for an ETF versus a comparable mutual fund. They also have an edge in terms of their tax efficiency, helping to reduce your overall tax burden. ETFs are also much easier to trade than mutual funds because they trade just like stocks with their prices quoted in real-time.
Also, an ETF is much cheaper than investing in single stocks because a fund offers a basket of stocks as a single investment. If an investor wants to invest in these stocks individually, he would not only need more capital but also incur more expenses because of the multiple transactions.
4. Buy mutual funds directly from fund companies
If you must invest in mutual funds, then you should buy directly from fund companies at no charge. These funds tend to have higher-than-usual expense ratios compared to market index funds as they are actively managed. But many often have no sales load or transaction fees associated with their purchase.
5. Avoid products with sales loads or 12b-1 fees
Brokers, or intermediaries, must be compensated by funds that sell their shares through them. This can be accomplished by charging investors a “sales load” that is paid to the selling brokers. A sales load is similar to the commission that investors pay when they buy any form of security from a broker in this regard.
There are two sorts of sales loads: front-end and back-end. Investors pay front-end sales load when they buy fund shares, and back-end sales charges when they sell fund shares. Fees paid by the fund out of fund assets to meet distribution costs and, in some cases, shareholder service costs are known as 12b-1 fees.
Investing in financial products that have any of these fees would erode your profits over time as you would be charged each time you initiate a (buy or sell) transaction. As such, it is better to avoid these types of investment products in their entirety.
6. Avoid over-trading
Avoiding overtrading is another technique to save money on trading expenses. Overtrading occurs when a trader loses a few deals and then tries to make up for them by trading over and again in the hopes of recouping his losses. Even if some of the future trades are profitable, this technique might result in large commissions that wipe out all of the profits.
In trading, doing more can be detrimental. Traders may be better off waiting for longer-term, larger rewards rather than scalping at other times. The amount of your trading account and your trading strategy will decide this.
Reminding yourself that you can’t force the market in your direction is the greatest approach to avoid overtrading. Either there is or there isn’t a chance. When there isn’t a realistic option, doing nothing is preferable to doing something.
Key takeaway
This article has explored how to reduce fees and trading expenses on your investments. The article highlighted various types of fees and how they are charged. It also discussed various ways of reducing fees and commissions ranging from looking for products that have the lowest fees, to minimize the number of trades one initiates.
Investors have to realize that brokers and portfolio managers are out to make money, no matter how altruistic they present their motives to be (which includes making more money for you).
As such, the tables are slightly tilted against you because apart from the inherent risks that come with investing, you also lose part of your profits to fees and commissions. Albeit, a well-detailed plan should recognize these factors and seek the best ways to optimize profits and reduce costs.
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