Costs to consider for first-time investors in the stock market
One critical aspect of investing in the stock markets that beginners regularly overlook is the actual costs involved in buying and selling assets. All of which can eat into any potential returns you might enjoy on said investments. The reality is that all forms of investing carry a real cost.
The temptation among first-time investors is to look at trading fees as being deceptively cheap. For example, an expense ratio of 3% may not sound a lot in the grand scheme of things, but it’s 3% more than your investments need to move in the right direction before you can enter profitable territory. If you are successful with your investments in the stock market, static fees of 3% will rise exponentially in time as the money you invest per trade grows on a sliding scale.
Below, we’ve put together some of the most common fees you might encounter when trading the stock markets as a newbie.
Annual fees and custodian fees
If you decide to invest in funds, such as actively managed and tracker funds, or even investment trusts, the chances are you will incur an annual fee. This can range from as little as 0.25% up to 1.8%. This sum is designed to cover a host of ongoing charges relating to investment management and the general administration of your investments. Custodian fees also apply to those saving and investing for retirement, with investors typically charged up to $50 per annum to cover the costs of meeting IRS reporting regulations.
Loads
There are two types of “loads” that can be charged to retail investors. A front-end load is paid at the time of acquiring new shares. Meanwhile, a back-end load is paid at the time of selling the new shares. It may be possible to find “no-load” mutual funds to invest in that don’t incur sales charges. However, the flip side to using “no-load” funds is that they make their money in other ways with higher expense ratios to cover ongoing costs like marketing, advertising, and distribution.
Commissions
Commissions are the costs incurred by utilizing a broker to buy and sell equities on your behalf. There are brokers out there that will commit to zero commission trading, with no upfront charges paid by you to buy or sell shares. The overarching benefit of commission-free trading is that a greater proportion of your funds are invested instead of being ring-fenced for commission.
Zero commission brokers are more commonplace than you might think. That’s because they make their money in other ways. Brokerages that adopt this so-called “freemium” model will often charge for interest earned from banks on client funds, as well as forex (FX) fees on top of the bank’s base rate for transacting on equities listed on offshore stock exchanges.
Brokerage fees
When you invest with a brokerage online, you may be hit with an annual or monthly account maintenance fee. This pays for your use of the broker’s trading and research platform. It is sometimes a tiered fee, with those who use the most trading tools and analytics asked to pay more than the average investor.
Advisory fees may also be included to cover the cost of the broker’s time and effort in developing wealth strategies for their clients.
Whatever you do, make sure that you have a solid understanding of all the costs you will be liable for when investing in equities online for the first time.
