Minimize Trading Costs To Maximize Profits

| August 4, 2008 | 0 Comments

A few years ago I decided to replace an old faucet in my bathroom.  Now I’m not the world’s greatest handyman, but I’m not a complete novice either.  I’ve managed to stumble my way through a number of home repair projects.  Some turned out better than others.  But for some reason this faucet replacement was really causing me problems.

In the course of my work, I discovered a few other plumbing problems clearly beyond my skill set.  It was time to call in an expert.  A few days later, Dave the plumber showed up and started working through my plumbing fix-it list.

I watched in amazement as he quickly and effortlessly replaced the faucet.  This was the very faucet I had struggled with for more than a few hours.  It took Dave all of 15 minutes to get it working.

Now you know why I’m not a plumber . . .

Dave was able to do something effortlessly that I had struggled with.  It wasn’t because he was smarter than me or because of his tools.  Nope. He had learned the little tricks of the trade.  He knew secrets to the project that I didn’t.

What Dave had that I lacked was experience.

So I know what you’re thinking, what does this have to do with making money in the stock market?

Most individual investors are like I am when it comes to plumbing – inexperienced.  Unless you’ve been trading on Wall Street for years, you might not know some of the tricks of the trade.  These are little secrets that the Pro’s know giving them an edge when making money.

But here’s the best part.

Many of these secrets are easy to learn and can make a huge difference in your profitability.  Today I’m going to share with you one of those little secrets that many beginning (and even experienced) investors ignore. It’s a simple tip.  But it can have a dramatic impact on your financial future.

Here’s the tip:  Professional traders always work to minimize their expenses when trading.

I know it sounds simple.  But here’s the problem.  Most investors don’t really understand just how important this little secret is.

Let’s look at a simple trade.  You risked $2,000 to make a $150 profit over a 30 day time period.  The trade itself doesn’t matter.  What matters is the amount of money you put in your pocket.

You collected your profits and laughed all the way to the bank.

But don’t laugh too hard.

Your profits aren’t what they could have been.

By risking $2,000 worth of capital to make $150 your return is around 7.5%.  Not bad for 30 days work.  If you could do the same trade 12 more times over the course of the year you’d have an annual return of 90% . . . outstanding!

But, we’re forgetting one important thing . . . commissions.

Now, commissions aren’t a bad thing.  Your broker provides an important service and they need to earn a living too.  But, some brokers charge more than others.  One broker might charge you $15 per trade.  You pay to get in and you pay to get out, so the total cost is $30.  So you made $150 on the trade but after commissions you only took home $120.

It doesn’t seem like much at first but think of it this way . . . Your broker is taking more than 20% of your profits.

One way you can minimize these costs is to shop around.  Each broker is different, and they all provide different levels of service.  Some might offer access to options and futures markets.  Some might offer generous margin rates.  Some might offer research and other valuable information. Some brokers will offer just the bare bones trading.

We don’t suggest one broker over another, its company policy.

What I can suggest is that you take a few moments right now to look around.  Tour some of the online brokers and learn how their systems work.  Check their commission rates and fee schedules.  You might find a better broker for your situation.  All things being equal, the lower your fees the more money you’ll be putting in your pocket at the end of the day.

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Category: Stocks

About the Author ()

The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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