Understanding the Costs of Investing

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CashWe like all like the idea of earning money with investing. Choose the right investment, and you could find an improvement in your financial situation. You don’t even have to make big gains in a short period of time. You can engage in dollar cost averaging, or choose an investment that is likely to do well over time. No matter how you invest, though, there is always a cost. You have to pay to play.

Whenever you buy or sell an investment, someone else is involved in the transaction. This means that you can expect to pay fees. You can’t completely avoid investing fees, but you can look for funds, or look for online brokers and others who offer lower fees. Every time you pay a fee, you are eroding your returns, so keep that in mind.

Common Investing Fees

Whenever you invest, you can expect to pay fees. You can find information about the fees charged in a prospectus, or an online brokers web site. Ask your broker for a complete fee schedule so that you can determine what services are costing you. If you are choosing an online broker, you can use the handy brokerage comparison tool from Bankrate. Here are some of the more common investing fees:

  • Account maintenance fees: In some cases, you might pay account maintenance fees to keep your account with some brokers.
  • Transactions fees: Each time you make a trade, you are likely to be charged a transaction fee. When you buy and when you sell, you are charged a fee. If you have holdings inside a mutual fund, you are often charged a transaction fee when an investment is moved in or out of the fund. In many cases, you will pay a flat fee for this service. Some brokers, though, charge a percentage of the trade, or charge on some other basis.
  • Mutual fund expenses: Mutual funds come with their own expenses. You will pay operating expenses, that cover costs associated with running the fund. Additionally, you might pay load fees, designed to compensate brokers. Even on no-load funds, there are other fees that are likely to be charged. You should go through the entire prospectus to make sure you understand the fees associated the mutual funds.
  • Transfer fees: In some cases, if you transfer to a new broker, you might have to pay specific fees associated with the transfer.
  • Other broker fees: There are other fees you might pay. You might find that, when you use an online broker, you can access additional services, such as real time trading or a telephone consult, for extra fees. Also look for other fees that might crop up.

In addition to broker fees, you should be aware of other costs that might come with investing. If you see capital gains, you will need to pay taxes on your earnings. Depending on how long you have held the investment, you will either pay according to whether you have long-term gains, or short-term gains. Before deciding on an investment, or on a broker, do you research and be aware of the costs.

(Photo: bfishadow)

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6 Responses to “Understanding the Costs of Investing”

  1. Jeroen says:

    Considering the fees, is there a minimum amount of money that you should invest? Or could I invest, for example, $10 and still make a profit?

    • govenar says:

      If you buy some popular ETFs, some brokerages don’t charge commission for them. Though if the share price is over $10 you’d have to buy a partial share which is harder; you could do that with Sharebuilder, or look into DRIPs (but those are only from particular companies).

    • Dan says:

      Investing $10 isn’t worth your time. A good gain on a stock will be 10% in a year, and that would only net you $1. In addition, a typical trading fee for Scottrade, for example (I use them), is $7 to buy and another $7 to sell, so you’d need your stock to go up 240% just to break even. When I invest, I’ll rarely buy less than $1500 worth of a stock at a time, unless I’m reinvesting dividends.

  2. Nice post.

    Recently, I’ve been considering going ahead with dividend reinvestment plans for some of the large-cap companies I have shares in.

    Often, you can buy more shares in these companies at discounts, plus you don’t incur any commission fees in the process.

  3. skylog says:

    good post. fees can take such a large percentage of one’s gains, it certainly pays to pay very close attention to how/when and how much they are…as well as how to avoid them.

  4. Good overview of investing fees. They should definitely be taken into consideration before making the actual investment. Many a times, these fees are overlooked by newer investors… 🙁

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