April 13: Small Scale Stock Traders Must Consider Hidden Costs

by David Jenyns on April 13, 2007

There are those who buy and sell stock as a profession. They either handle their own assets or act as brokers for customers who put them in control of investment portfolios. These expert handlers of stocks are able to make large scale deals that can generate or lose substantial sums of money. Those in these professions are experienced and trained to evaluate not only the cost of stocks at any given minute, but also the costs involved in making transactions. They consider all of this information before moving their own money or that of their clients.

Smaller scale stock traders, including those who approach trading as a way to “play the market” in hopes of generating some extra money, day traders who see the market as a way of making money via stock gambling and others are often blind to the costs of making a deal until they see their final numbers.

It is easy to become preoccupied with other aspects of a deal. For instance, if you purchased two hundred thousand shares of a stock for ten dollars and saw its value escalate to thirty dollars per share, you would know immediately that a sizable profit could be generated by selling (if you believed the time to be right). The various costs of doing business would decrease the profitability of the sale, but there is no way a deal like that could be anything less than a winner in terms of improving the overall bottom line.

The process is muddied considerably when looking at a small-scale transaction. Imagine you bought ten shares of the same stock and the same price tripling occurred. You could sell the stock and reap a two hundred dollar profit, right? After all, the stock went up by twenty dollars per share, and you have ten shares.

This is why smaller scale traders must look at some details before making a decision. From that $200 profit, how much will be lost in fees and expenses? This number can vary considerably based upon the exact set up the individual stock trader uses. However, it is possible that one’s overall profit margin could be reduced by as much as thirty percent on a deal like the one mentioned, even before any taxation considerations.

This is because most smaller traders will be paying fees for each transaction and may be on the hook for additional costs, too. The larger traders may be able to pull this off with little concern–the costs will be less as a total percentage to bigger players and any loss in fees and expenses will eventually be offset somewhat once tax season rolls around.

Smaller investors don’t always have the luxury of looking past fees and costs. Thus, they must first shop for the best possible deal. They must remember that their total per transaction profit may not always be sizeable and should make sure the fees they are paying will not eventually end up sucking up a great deal of their margin on any given deal. After finding the right services, the smaller stock trader must also keep the costs of making transactions in mind as they approach handling their stock investment portfolio.

Being a small investor can be both fun and rewarding, but it is also something of an uphill struggle. Fees and costs can be a real margin reducer, and the smaller investor really often does need to work harder than his larger counterpart in order to make the same percentage of profit.

These realities have led some to simply invest in mutual funds with a profile they appreciate and leave the trading to the “big boys.” This is not necessary, however. With a strong understanding of the real price of doing business, combined with earlier careful service selection, even a small investor on the stock market can begin to carve out profits for himself or herself. It may require some efforts to build one’s stock trading investment up enough to become one of the larger investors, but it is possible. Even the smallest stock trader can find ways to profit if they keep their costs squarely in mind when effectuating a transaction.

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