Are you trading stocks with a discount broker like eTrade?
Are you thinking about it?
Well those $6.95 trading commissions may not be as cheap as you think.
It depends on how much you invest but if you invest $100 per trade, $6.95 is a 7% fee.
Yesterday I wrote about The Dogs of The Dow.
I noted that in the return comparison, they didn’t account for trading commissions.
Here we will see what commissions do to your returns.
So let’s dive in.
How Does $6.95 Trading Commissions Compare to Other Investments?
$6.95 is almost a 7% fee on a $100 trade. That’s steep.
But what if you put that $100 in something else?
If you went with an index fund from Vanguard or even a fund of funds with John Hancock, you wouldn’t be charged a commission.
It’s called “no-load” in the mutual fund world.
$0 and 0% is much better than $6.95 and 6.95%.
But what does $6.95 do to your return?
How Does $6.95 Trading Commissions Impact Your Returns?
Here’s where the rubber meets the road.
If you put $100 per month in a Vanguard Index Fund and make a 10% return, how does that compare?
Well if you invested $100 and paid $6.95 commissions, your 10% return would drop to 9.76%.
.24% just because you paid just $6.95 in commissions each trade.
That doesn’t sound like a lot so how much is that?
How Much Does $6.95 Actually Cost You?
If you invested $100 per month for 40 years, .24% would cost you $43,952.
$43,952 is a lot of money to me.
And you would need a 10.24% return just to break even.
I don’t know about you but I don’t like stacking the odds against myself.
And didn’t even get into the fact that most investors under perform against index funds.
So the costs of $6.95 trading commissions could be far worse but that’s a post for another day.
$6.95 trading commissions sound cheap.
But they are far more expensive than they sound.
After all, 6.95% commissions doesn’t have the same ring to it.
So next time you hear that advertisement, you’ll know how they get you.
They are in the business of making money.
Do you trade with $6.95 trading commissions?
Let me know in the comments below.
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