Why Getting Fired by my First Broker was the Best Thing that Happened to me (or How I Saved more than $1500 of Trading Costs)
One year after I started trading, I was informed by my online broker that my account would be closed shortly “because we do not longer offer our services in your country of residence”.
I was outraged! I was addicted to that cool software they offered. And why do they refuse me as a valued customer anyway? *Hurt*
However… switching trader made me a better trader. In fact, it changed my entire trading style and let to better results, lower costs and less stress.
How? I will explain, but first, quick question…
What do you think are the costs of trading?
When I ask this question, the most common answer I get is something like that:
“Well, losing money in a market crash”
“Losing money in a downturn or bear market”
“When a stock I bought goes down in price it’s bad for my portfolio”
I rarely heard anyone saying, “those trading fees are killing my portfolio”.
And these answers are all valid concerns. Without a proper trading system in place, crashes or simply a series of bad trades can bankrupt a trader. This is the topic of risk and money management, which is a different subject.
What I am talking about here though is something else: the effect of fees on your investment.
It’s not just a stock trading thing!
Every investment has this issue. If you buy a house, you will be charged brokerage fees and various government fees and/or taxes. This can easily bump up the price of your property by 10% or more (hilarious, in my opinion!!).
With stock trading, fees are usually charged per trade, and such fees vary widely and depend on the type of brokerage, e.g.
- Personal stock broker. Pick up the phone, tell him which stock to buy and he does it for you
- Online brokerage firm. You do the trade yourself from your computer or phone. Lots of software and value-added services available
- Discount brokerage. Competitive rates, with less bells and whistles
If you have a personal stock broker, charges of $50 per trade are common. And that’s only one way… once you sell the stock again, you will get charged again.
Online brokerage firms charge between $15 and $5 per trade. That’s already much cheaper.
Discount brokerage firms offer trade fees starting at $1 per trade. They also might have a monthly flat rate.
So how bad is it, really?
It’s better than 10 years back 🙂 that’s the good news. However, fees can still make the difference between a mediocre return and a great return on your investment. I will compare 3 scenarios:
- No fees – that’s just for reference. In real life, there are always fees
- $10 per trade, a still common online brokerage fee
- $2 per trade, a discount brokerage fee
The difference between the two fees is a factor of 5. Quite a lot… but how much per year depends on how many trades are performed.
If I buy 2 stocks per week, that results in approximately 100 trades per year. If I buy and sell each time, it will be 200 transactions per year.
That’s a saving of $1,600 per year for something that both brokerages do equally well – making transactions.
Just by choosing a brokerage with lower fees, you improved your yearly return by 1.6%.
It does not sound like much, but consider this…
The long-term average return of the stock market (after inflation) is around 7% per year. If you had 0.4% fees yearly ($400 out of a $100,000 portfolio), then your return would go down to 6.6%. With 2% fees ($2,000 yearly) it would go down to 5%.
That’s 24% less than with a discount brokerage!
Ouch… making nearly a quarter less return because of higher fees? That’s already pretty bad.
My first broker charged me $25 per trade and I did not bother to shop around!
Because I loved their trading software. It was (and still is) beautiful. Easy to use, lots of information, hundreds of ways to come up with new ideas how to trade, etc. It was highly addictive. Such software looks something like that:
And I just hated losing it because for some reason that company decided they do not want to offer their services anymore in my country of residence.
But once I was pushed to do so, I started to look around… and I found a brokerage firm that charged me as low as $1 per trade (depending on the number of stocks per trade).
Which made me wonder… what’s the long-term impact of fees, i.e. 10 years or so?
Long-term it’s even more devastating…
I did the math for you and put it in a little chart, showing the return of investment over time.
The difference between the two different fees is a whopping 30 thousand Dollars over 10 years, for a 100k$ investment and assumed annual growth of 7%.
The same amount invested and same annual growth. Only different fees… that’s mind-boggling!
That’s because the money that is gone through fees is not available for trading… so it’s not just about losing the cash. You also lose future returns that you would have made by using that money. The longer you invest, the worse the effect.
But what about that trading software?
I learned to live without it.
It was not that hard. 30k$ can be a strong motivator! I switched to free online charts and spreadsheets and I learned A LOT about how to build my own trading system in the process; much more than I did with the trading software.
And guess what… my trading performance actually improved! All that experimenting, changing trading strategies etc. did not work to my advantage. Being consistent is very important in trading – and I could not justify anymore to leave ten thousands of Dollars on the table for a good looking software…
Where can I find out more about online brokers?
There are plenty reviews available. I suggest starting with Barron’s review.
For some reason, the link to their report does not work – but you will find it by doing a Google search for “Barron’s 2017 best online broker ranking“.
Think about what you really need from your broker. Do you really need their cool stuff? Would it not be better to use a spreadsheet and free online charts to get your trading strategy going?
And if you think you really need fancy software… how much are you willing to pay for it? How will it affect your portfolio? Will you be able to make up for such cost through “better” trading? Food for thoughts.
Switching broker took me less than a day and saved me thousands of Dollars.
Take the time to find the broker that is right for you. Opposite to common opinion, trading fees do matter!
If you already have a broker, which one is it? What are you happy or unhappy about?
And if you don’t have one yet, what would be the must-have feature?
Let me know!
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Trading fees can put a serious dent into your otherwise flawless trading record. Whether the market goes up or down, a brokerage company always wins.
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