Some people make things so hard for themselves in life and even when trading or investing. In life they do stupid things with their money and wonder why they are broke and others have money. In trading or investing they will start out buying a parcel of shares for $1,000 and spend $20 in brokerage commission to do this. What they don’t understand is this “commission drag” is setting them up to fail.
What is Commission Drag?
When you purchase shares or trade CFD’s (contracts for difference) you generally have to pay brokerage. This brokerage might be a minimum of $20 in some cases. You must always measure this as a percentage of your total purchase for example if you purchase $1,000 of shares and pay $20 you must divide this $20 by $1,000 and times that number by 100. What you get is 2% in COMMISSION DRAG!!!! This means that you need 2% just to break even. It gets even worse! This is just 2% on the entry, you then have 2% on the exit (sale). This means you have a round trip (purchase and sale) of 4% just to break even. This is even before contemplating on allocating an opportunity cost and/or interest paid amount on holding the stock in question.
Unless you are someone like Nick Fabrio who is a day trader and can make 150% of his capital in a month, you are just setting yourself up to fail.
What Should You Do To Succeed?
You need to start trading or investing when you are equipped in the best possible way in order to have a chance to succeed and not blow up. You need to make sure you are well capitalized. This means you might need to buy parcels of at least $5,000 a time so the commission drag is far less of an issue. Or maybe you need to join a low cost broker that is designed for active trading like FP Markets. $20 brokerage on a purchase of $5,000 is 0.4% on entry and obviously 0.4% on exit. This is much more acceptable 0.8% total commission drag and you should be aiming for less than 1% round trip for brokerage as a maximum amount as a general rule of thumb. With FP Markets you can set up an account that offers no minimum commission rate. This means that you can control $1,000 of shares for under $1. This is much better than brokers like Commsec and NabTrade at around $15 to $20 minimum!!!
Good luck and keep saving if you need to. Don’t be a in rush to ruin.