The Cost of Commissions

You probably pay your brokerage a commission every time you buy or sell stocks, and that fee deserves some consideration.

How much you pay per trade isn’t a critical issue if you trade only a few times a year. But if you buy and sell stocks (or other securities) relatively frequently, the commissions can make a difference in your results.

For example, imagine that you invest $200 in shares of Drive-Thru Dentistry Inc. (ticker: DRILZ), and you pay a $15 commission. Divide $15 by $200 and you’ll get 0.075, or 7.5 percent. That means you’ve invested $200, but at the same time you forfeited 7.5 percent of that value in commissions. If the shares rose 8 percent in the first year, you’d barely break even, instead of realizing a meaningful gain.

Frequent traders, such as day traders, can be hurt worse. For instance, if they buy and sell $200 worth of a stock in a day, they’ll pay $15 to buy and another $15 to sell. They will need to have gained more than 15 percent just to turn a profit.

So what should you do? Well, it can help to use a brokerage that has low commission costs (perhaps $5 to $7 per trade, or less), as many do these days. Also, aim to keep your commission costs at 2 percent or less per trade, if possible. If your brokerage charges $20, then try to invest at least $1,000 each time you buy stock. (Multiply the commission by 50 to see what it’s 2 percent of.) If your brokerage charges just $7, your minimum would be $350. You can always save up money until you have enough.

If it’s hard for you to come up with hundreds of dollars for each stock purchase, know that you can also invest small sums regularly through direct investing plans (Drips), which let you buy stock directly through companies, bypassing brokerages altogether. Many major companies offer Drips. If you can type this long address into your browser, you can learn much more about Drips: