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What percent of assets do you pay in transaction fees?

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January 12, 2012 – Comments (3)

This question has a relatively simple answer. One can simply determine how much, over the last year, was paid to the brokerage firm in transaction fees and then divide that by equity. This would reflect the transaction fee expense for your account.

I would like, however, to suggest a more complicated matter. There is this idea that the money paid to the broker in transaction fees is not all that there is to transaction fees. Allow me to illustrate with a simple example.

Suppose that you decide to trade 100 shares of XYZ. Your brokerage firm charges $10 per transaction. If you were to buy 100 shares and then sell those shares, assuming nothing has changed, you would incur $20 in transaction fees. Right? 

And here's where it gets more complicated. Let's suppose that you place "market" orders and that again nothing has changed. We now need to consider the bid/ask spread. The bid/ask spread is simply the difference between the ask and the bid price. When I place a market buy order my order gets filled at the ask price. When I turn around to place a market sell order my order gets filled at the bid price. So I actually lose money in the process because the ask price is generally higher than the bid price. So now we need to add into our transaction fees the following:

 (Ask - Bid) * 100

So now for the total trade (both buy and sell) I paid $20 + (Ask - Bid) * 100.

If the Bid/Ask spread is small like for many high volume stocks (say $.01) and the number of shares traded is small, the transaction fees resulting from the Bid/Ask Spread is neglible (compared to the transaction fees paid to the broker).

On the other hand, if I am dealing with a large quantity of shares and/or relatively illiquid stocks that have larger Bid/Ask spreads, then the effect can be quite material. 

This can easily add up for "penny stocks" or stock options in which large quantities of securities are purchased at relatively low prices but with relatively high Bid/Ask spreads. 

Obviously a relevant feature here is how long one holds positions. If positions are held for many years, the effect of transaction fees will be relatively small. If, however, positions are held for a matter of months (or days or hours), the transaction fees can become a very large percentage of assets. 

While I don't expect folks to divulge such information, I think this is a worthwhile excercise and something that ought to be taken into account when developing a portfolio and investment strategy. So what was your transaction fee expense for last year?

3 Comments – Post Your Own

#1) On January 12, 2012 at 10:04 AM, Teacherman1 (47.61) wrote:

$180.00. The same as it is every year.

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#2) On January 12, 2012 at 8:15 PM, rd80 (98.00) wrote:

Zero.

No commissions/transaction fees.

Always use limit orders.

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#3) On January 12, 2012 at 9:42 PM, TMFDanDzombak (82.64) wrote:

$120 for the year.  Interactive Brokers

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