| Nickel
&
Dime
A
word of advice to beginning traders: if you skimp on your
bankroll, trading commissions will kill you.
This is true for even the
super “discount” brokers. Suppose you open an account with
an online broker for $1,000, and the broker charges $10 per
trade. In this case, it is highly unlikely you will be able
to profit from frequent trading because the $10 per transaction
will eat your bankroll alive, even if you select winning stocks.
Here is an example. Suppose
you invest ¼ of your $1,000 on a trade for $250. Now suppose
that trade returns a whopping 10% gain. Did you make 10% on
your $250 investment? No, because buying the stock cost you
$10, and if you sell the stock for profit that will cost another
$10, so your net gain is only $5. By any standard, a 10% move
on a single trade is substantial, but because of commissions
you would only realize 2%. Certainly, if all your trades returned
2%, this would not be a problem. But realistically, you will
have enough losers to overwhelm these small profits.
"Trading is like any
other business and requires sufficient capital.
While the idea of running up a shoestring to some
miracle profit is romantic, it is unrealistic
if not impossible making frequent trades. This
is due to the broker’s commissions."
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Since some of your trades
will lose money, scratching for 2% gains won’t be enough to
grow your account overall, and in fact you will probably lose
money. The only chance you would have is to build a small
portfolio and hope that it grows continuously over very long
periods of time to swamp the commissions. Frequent trading,
however, will be out of the question.
With a much larger account,
say $10,000 or more, the commissions become more negligible.
For instance, trading 1/4 of your stake would have been for
$2,500, returning $230, which is much closer to the stock’s
gain of 10%. With a $100,000 bankroll, the commissions are
reduced even further, to near insignificance.
Trading is like any other
business and requires sufficient capital. While the idea of
running up a shoestring to some miracle profit is romantic,
it is unrealistic if not impossible making frequent trades.
This is due to the broker’s commissions, something that is
rarely discussed in other literature about trading.
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