Commissions
Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value. Buying a thousand shares of GE at $20 a share, with a total value of $20,000, would have set you back $100 to $200 on the way in and again on the way out. Fortunately for traders, commission rates have plummeted.
The extortionate rates haven't completely disappeared. While preparing this book for publication, I received an e-mail from a client in Greece with a small account whose broker-a major European bank-charged him a $40 minimum on any trade. I told him of my broker whose minimum for a hundred shares is only $1.
Without proper care, even seemingly small numbers can raise a tall barrier to success.
Look at a fairly active trader with a $20,000 account, doing one roundtrip trade per day, four days a week. Paying $10 one way, by the end of the week he'll spend $80 in commissions: $40 for entries and $40 for exits. If he does that 50 weeks per year (if he lasts that long), by the end of the year he will have spent $4,000 on commission. That would be 20% of his account!
George Soros, a top money manager, delivers an average 29% annual return. He wouldn't be where he is if he paid 20% a year in commissions! Even a "small commission" can build up a major barrier to success! I've heard brokers chuckle as they gossiped about clients who beat their brains out just to stay even with the game.
Shop for the lowest possible commissions. Don't be shy about bargaining for lower rates. I've heard many brokers complain about a shortage of customers-but not many customers complain about the shortage of brokers. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time. Design a trading system that will trade less often.
In my own trading, I maintain one major account with a broker who charges me $7.99 for unlimited size trades and another with a broker who charges a penny a share, with a $1 minimum. When I trade expensive stocks, where I buy fewer than 800 shares, I give that order to the penny-a-share broker; otherwise, I go with the $7.99-per-trade broker. A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your 100 shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade.
From the book
STUDY GUIDE
FOR THE NEW TRADING FOR A LIVING
DR. ALEXANDER ELDER
