I’m often asked about brokerage fees and investment fees. Questions come in all forms — DMs, emails … even in the Trading Challenge chat room. My goal with this post … and the reason I wrote it … is to get you to shift your mindset.
So pay attention! Take notes. Lack of investment in yourself and your trading career is the biggest fee you’ll ever pay…
Table of Contents
- 1 What Are Investment Fees?
- 2 5 Investment Fees Eating Into Your Trading Profits
- 3 Conclusion
What Are Investment Fees?
If you’re a long-term value investor — which I’m not — you’ll want to look into certain fees.
For example, a mutual fund costs money to run. So mutual funds have an expense fee. Fund managers also charge a management fee. This is typically around 1% of the money under management.
A few more investment fees you might pay…
Front- or back-end load fees: These fees are charged by fund managers when you buy or sell shares in the fund. Sometimes fund managers incentivize you to stay invested. How? By reducing the back-end fee percentage every year you stay invested.
Account fee (called a custodian fee for IRAs): This is an annual fee for brokerage accounts and individual retirement accounts. It covers the cost of reporting to the IRS.
Transaction fee: If you buy or sell stocks in your account, there’s often a transaction fee. In my world — again, NOT investing but trading — I pay commission fees to trade. Happily. It’s part of the cost of doing business. More on that later.
Why Investment Fees Matter
Hopefully, this is obvious…
For example, if your long-term investment gives you a 10% annual return … but 2% gets eaten by fees, it adds up over time. (Good luck with that, BTW.)
Again … this isn’t for me. But if you’d rather invest than trade, that’s what you’re looking at. Do your research before you invest.
I repeat … I’m not an investment advisor. I don’t manage other people’s money. And I’m happy to pay the fees I pay.
Let’s get on to what I do … which is trade.
To trade, you have to pay brokerage fees. The fees vary depending on your broker and trading frequency. Some brokers charge you by the trade. Others charge by the number of shares you trade. Still others charge by the trade but give you a discount if you trade often enough.
Before I go any further, and because I know someone will ask this question…
I use two brokers: E*Trade and Interactive Brokers. I don’t get paid by them. As a matter of fact, brokers basically hate me because I teach students to trade less. So my students (at least those who heed my warnings) don’t give as much back to brokers in fees.
Why Trading Fees Should Be Low on Your List of Concerns
I’ll get into this more, but let me put it this way: trading is a business.
It’s a business that can potentially make you rich. But to do so, you’re gonna have to work your butt off … and pay commissions and fees. Of course, it’s good to reduce your cost basis, but don’t fall for the coupon-clipping mentality. It’s a false economy.
(My results are not typical. Trading is risky and you could lose part, or all, of your money. I’ve built my knowledge and expertise over two decades. Most traders lose money.)
Are Brokerage Fees Tax Deductible?
I’m not a tax advisor. I don’t proclaim to be a tax advisor. Please seek the advice of a professional.
Here are a few questions you should probably ask your tax professional…
- Is it beneficial to set up as a company rather than a sole proprietor? If so, which type of company structure should I use?
- Which fees can I deduct on my taxes and how?
- Do I need to report regularly or complete certain forms to maintain my status?
- How often do I need to trade to gain trader tax status (TTS) by the IRS? (This is important. The number of trades required is over-trading in my opinion. Especially if you have less than three or four years under your belt.)
If this all seems complex, it is. There’s a lot that traders need to know about taxes. I’d rather focus on what I do best and let the tax professionals do what they do best.
With that in mind, let’s look at ‘investment fees’ from a trader’s perspective.
5 Investment Fees Eating Into Your Trading Profits
A lot of you ask me about brokerage fees…
“What about Robinhood? They don’t charge fees…”
They might not charge commissions, but…
… from what I’ve heard, the trade-off is less than optimal execution and a lack of services. The questions is, by potentially saving a few bucks (say, for example, $5 or $10) on fees, can you lose $100, $200, or more on poor execution or a missed trade? I’ll leave it up to you to find out.
People think they’re saving money on all these fees. You gotta take a step back and think. All those little fees … $3 here, $5 there … those are negligible. If you’re trading the right way. That’s why I wanted to write this post.
I’m not writing this from the perspective of ‘I’m rich so brokerage fees don’t matter to me.’ I didn’t start rich. I’ve spent 20 years trading. I’m always willing to pay commissions for good service and good trade executions.
So think about the commissions that everyone likes to whine about…
… if you’re serious about trading, you’d better change your mindset and be happy to pay them. Consider the alternative.
Broker Assistance: The “Get Me Out of This Trade!” Fee
Occasionally you might get into a trade that you need to get out of fast, but for some reason, you can’t. For example, what if your Wi-Fi crashes while you’re in a trade and you need to cut losses quickly? You have to call your broker and get it done.
This will cost you more than if you’d been able to get out using the online trading platform provided by your broker. Why? Because you’re dealing with a real human being who has to fill the order on your behalf.
The thing is … you need to work with a broker who allows it and is willing to do it. And if it costs you more for that trade but saves you from a big loss … then it can be worth it. So don’t skimp on this if you find yourself in a bad position. ALWAYS follow Rule #1: Cut Losses Quickly.
If you’re a short seller, you have to pay borrow fees. Your broker will charge you a per-share fee, and the amount depends on the stock. If a stock is more difficult to borrow — say after a massive first green day — then borrow fees are higher.
If you’re shorting, you’ll also have to pay interest on your margin account. Yep, you have to have a margin account to short. Even if you have enough cash in your account, Regulation T (Reg T) means you have to use a margin account as collateral.
This is yet another reason I don’t recommend newbies and those with small accounts short. The fees can destroy you. But … your mindset has to be ‘there are inherent trading costs.’ Not ‘save at all costs.’ I made my second million as a short seller. I was a short seller for years. It can be very lucrative. But you better be prepared and be ready for the fees.
Limit Orders vs. Market Orders
This might sound weird if you’re new. But it’s super important. I use limit orders on all my trades. I suggest you do, as well.
What’s a limit order? With a limit order, you set the price at which you’re willing to buy or sell. The market maker then buys or sells on your behalf at your price or a price more favorable to you.
For example, if you put in a limit buy order at $1, the market maker has to execute your order at $1 or less. On the flip-side, say you put in a limit sell order at $1. The market maker has to execute at $1 or more.
What happens if the price is moving too fast and you can’t get executed? Well, then you’ll need to cancel the order and either reorder at a different price or just sit this one out. It’s called slippage when the price goes beyond your limit order.
“Tim, why not just use market orders? At least you’ll know they get filled, right?”
NO! Don’t do it!
If you place a market order, the market maker can fill your order wherever they want. If a stock is spiking, you could get filled right at the top before it tanks again. And it’s completely out of your control. Use limit orders.
You’ll pay higher commissions to place limit orders. Why? Because when you place a limit order, it takes more work for the order to get filled at the price you want. But it’s NOT the fee eating away at your trading profits.
Market orders eat at your profits because your risk vs. reward goes right out the window.
The Coupon-Mentality Fee
You probably think I’m being funny with this one…
… I’m not.
Too many people have this whole coupon-clipping mentality. And they transfer that to trading. It’s not gonna make you rich. It’s costing you money. It’s like a massive hidden fee you pay when you’re scared of paying normal fees.
I want to pay my brokers fees for good service. Just like I pay the U.S. government taxes. If I’m paying a lot in taxes, it means I’m making a lot of income. Brokerage fees are no different. If I’m paying fees for commissions it means I’m trading. And when I trade, so long as I follow my rules and trade good setups, I make money.
(That’s not to say you should over-trade. Be careful of over-trading. Especially low-priced stocks.)
If you’re trading good setups and making money, then paying 1%–3% on fees is NOT a big deal … It’s fine.
Look at it this way: Brokers can potentially provide you with a lot of tools and excellent service. Figure out which broker can do that for you and then pay the fees.
Focus On the Game
I wanna focus on the game. Brokers are a necessary part of the game. They keep me in the game. If I have to use a specialized broker with specialized fees to be in the game… I don’t care! I trade to make money. NOT to save money.
When I first started I wanted to become a millionaire playing the game. I wanted to trade the best setups, cut losses quickly, and grow my account. That’s it. If I had to pay fees to do it, that’s what I did.
So if you want to be in the game, you have to change your mentality. Work on changing your mentality to grow your account over two, three, or five years.
It’s a tough lesson.
Obviously you want to keep fees minimal. But stop sweating the small stuff. Stop creating a self-imposed obstacle to your success.
Instead, understand that fees are part of doing business. I know you want 100% of the pie. Well, 100% of a very small pie sucks. Why not take 97% … or 90% … of a very big pie? Shift your mindset.
One of the reasons I got into teaching is because so many people seem brainwashed when it comes to making money. I see it over and over again. I know it’s true because people ask the same questions about brokers and fees and how to cut corners.
The Trading Challenge is my most comprehensive program. It includes everything I’ve learned over the last two decades. You get DVDs, video lessons, live webinars, archived webinars, a chat room, mentorship … the list goes on.
One of my greatest joys is to watch my students make the mindset shift from “How do I save a little money here or there?” to “I’m happy to pay for the best service and the best execution.”
So if you’re ready … really ready … to work your butt off and change your mindset…
… if you want to utilize the stock market to improve your life and your family’s life the way I have … and…
… the way my top students have…
… learn to play the game the right way. Apply for the Trading Challenge today.
Are you a trader? What false economy ‘fees’ have you paid in the past? New to trading? Comment below with “Trading is a business and I promise to treat it that way.” I love to hear from all my readers, so comment below!