Investing can help you generate returns, but if you are not careful with the fees and commissions, these can impact your profits. But how do you reduce fees and commissions, and how can you prevent them from eating your profits?
In this guide, we’ll go over some of the best ways to reduce the fees and commissions you are paying and how to generate higher profits from trading and investing.
Why fees and commissions are important
Whenever you invest or trade a stock or other financial products, your broker typically charges you a fee. Every time you put your money to work, either by buying or selling a stock or an ETF, a small percentage of it leaves your portfolio instantly in the form of fees.
The problem is that if the fees and commissions charged every time you trade are a large percentage of each of your trades, your returns end up being lower than they could be.
How to reduce investment fees and commissions
There are a few steps that are important to take to reduce the fees and commissions you are paying to your broker. Here is what you need to do:
1. Understand what you are trading and what kind of investor you are
The first step is to understand precisely what kind of investor or trader you are. Some investors use a passive investing approach, which includes investing in index funds and keeping their costs low, as well as the number of trades they make.
If you are investing passively in ETFs or index funds, consider the management fees each fund charges. You will find a big disparity in management fees charged by similar index funds tracking the same index.
Obviously, the higher the number of trades you make, the more critical it is to consider fees and commissions. If you are making many trades every year and paying high fees, these will eventually eat your profits.
If you are trading, you are also more likely to engage in even more trades, and for that reason, it becomes even more important to pay attention to the fees you are paying.
It is also crucial to determine what exactly you are trading. Do you focus on investing in stocks or ETFs, or are you an active trader of options and futures?
2. Choose a broker that offers the lowest fees for what you trade the most
Choosing the right broker depends on the type of trader or investor you are. So if you are mostly focused on stocks and ETFs, look for a broker that offers the lowest fees on these products.
Conversely, if you are actively trading options and futures, for example, you will have to look for a broker that provides those at the lowest cost.
Additionally, if you are using margin, you must consider how much interest the broker charges you on those margin loans.
With all of these aspects to consider, it explains why some investors and traders have multiple brokerage accounts, so they can take advantage of the lower fees some brokers offer.
Discount brokers offer a lot of value, depending on the one you choose. You will find low fees and commissions on multiple products. You can also consider brokers that do not charge fees, which can be a useful way of avoiding fees and commissions altogether.
3. Choose your trades wisely
One of the most common mistakes investors and traders make is overtrading. This not only can affect your returns, but the fees can also add up and eat your profits. Consider every trade you make and ponder precisely why you are doing it.
Using an investment journal is another simple way of writing down every time you trade and why exactly you are making that trade. If you find out that you are overtrading, you can always go back to your journal and understand precisely why you are overtrading, which makes it easy to avoid it in the future.
4. Understand the broker fee structure
Different brokers will have different fee structures, and it is crucial to understand precisely how it works. Some brokers will charge you a yearly fee on top of a commission on every trade. Some will charge you to keep your balance at a certain level.
Additionally, some brokerage firms may also charge you to use a certain platform or to access their research. Therefore, you will have to understand what the fee and commission structure is, so you can prevent it from eating your profits.
Fees and commissions are inevitable when you are investing, and one way of maximizing your returns is to pay special attention to what your broker is charging you. Follow these simple steps, and you can easily keep your fees and commissions in check and avoid it eating your profits.