How much do brokers charge for a trade?
Some brokers will charge you a flat fee for each trade, regardless of the trading size. In other words, you can trade as little as €/$/£ 5 or as much as €/$/£ 1,000,000, the trading costs remain the same.
Other brokers might charge you a percentage of your trade, for instance, 2.5% of the trading sum. You need to think about what works best for you, but in general if your trading value is a couple of €/$/£1,000s, a flat fee is likely to be the cheapest option.
But an important thing to keep in mind: you will have to pay a trading fee when you buy and when you sell. If, for instance, you buy shares for €/$/£ 1,000 and your broker charges a fee of €/$/£ 2.00 for that trade size and then decide to sell them again one week later, you will again have to pay €/$/£ 2.00. Thus, a total of €/$/£ 4.00 in fees.
What is the minimum I have to invest?
You can invest as little as a few €/$/£ or millions. A friend recently asked me whether she could invest €50 just to give it a try. I told her that it would surely be possible, but that the fee-investment ratio will be too high. In other words, the trading fees (buying and selling) would make up too high of a percentage of her investment to make it worthwhile for her. Thus, when investing, keep the fee-investment ratio in mind. In her €50 scenario, it would not be advisable to place the trade.
In order to keep your trading costs to a minimum, it is better to start with anything from €/$/£ 1,000 upwards to keep the fee-investment ratio reasonable.
Why €/$/£ 1,000 – The Costs of Investing in Stocks
Let’s take my friend’s example again. If we assume a good online broker with acceptable fees, she would be facing initial losses of 10%, merely because of the very high fee-investment ratio and the fact that in order to be on the winning side, the costs first need to be amortized. Below the cost in percentage of a number of trade values and trading fees to give you a better idea of the point at which it makes economic sense to invest:
|
Trading fee
|
Investment amount
|
Cost in percentage of trade
|
|
5
|
50
|
10%
|
|
500
|
1%
|
|
1000
|
0.5%
|
|
5000
|
0.1%
|
|
6
|
50
|
12%
|
|
500
|
1.2%
|
|
1000
|
0.6%
|
|
5000
|
0.12%
|
|
7
|
50
|
14%
|
|
500
|
1.4%
|
|
1000
|
0.7%
|
|
5000
|
0.14%
|
You can see from the table that the higher your investment, the lower the cost percentage. The lower the cost percentage, the less your investment has to grow to break even.
If you’re buying shares for only €50, your investment will have to grow a massive 20% (€50 investment versus €10 trading fees).
At €5 for your €1,000 trade, your shares have to gain 1% (0.5% buying costs [€5] + 0.5% selling costs [€5]) or €10 before you are actually earning money.
If your investment is only €500, your investment has to gain a hefty 2% (1% buying costs + 1% selling costs) before you can even start to make money.
At €5,000 your shares only have to gain a meager 0.1% (still total cost is €10). This is a lot easier to achieve than the 20%.
Awesome, but what are shares?
The easiest way to understand shares is by taking the example of an office building:
If you own 1 share, you own 1 screw in the building. If you hold 10 shares, you are the grand owner of the door handle in the company. If you own a stack of 200 shares, the door to the CEO’s office is all yours.
But as you are unlikely to claim the CEO’s door, you are entitled to a percentage of the company’s profits; i.e., a dividend.
In fact, a share is simply a certificate that you own part of the business. Too often people think of shares as something ambiguous, complex, or even mystical, controlled by the powers of the financial elite. The truth, with each additional share you own, you are gaining power and influence in the company and become an ever more so important and proud owner of the business you have invested in.
In most cases, however, unless you have invested in a small firm or start-up, the number of shares you are holding are too few to exercise any real power. But by joining some type of shareholders association or siding with shareholders, particularly, bigger ones that share your vision of the business, you are able, as a cumulative power, to exercise significant influence on the business direction and management. And rather than complain about management pay, you are even able to steer the size of what managers receive in either direction by voting on whether their pay should go up, down, or remain stable.
One of the best things about shares is that you get to eat and drink for free. At any AGM (Annual General Meeting) you, as an eligible shareholder, will get something to eat and drink.
Investing in stocks is dangerous, isn't it?
Of course you can use them in speculative ways and lose a lot or even all of your hard-earned cash. And irrespective of what share you are buying, their value inevitably goes up and down. But, and this is a big but, you are in control of your finances and investments. You are the one who decides how to drive your investment vehicle. You are also the one deciding when to exit and when to enter the market. With you in the driver’s seat, you are the one to choose the company you want to buy shares in and when. Thus, choose carefully.
The right choice of the company you invest in is crucial. We here at Captain Finance know that choosing our ships and sailors wisely is of utmost importance and thus only select those companies that are strong enough to weather even the strongest of storms.
When the price goes down, we shrug it off as a temporary paper loss, reap the benefits in terms of dividends while the storms blow by and wait for the right moment to sell. The smart sailor follows these rules and uses shares as a safe vehicle to speed up the ship to the golden shores.
