Trading costs killing your profitability?

*This content is brought to you by Blackstone Futures

There are many things to consider when choosing a broker to trade with. These may include customer service, regulation or product and platform offering. You may have been swayed by some gimmicky advertising, a bonus for opening an account or some kind of loyalty programme. But one of the most important factors that is often overlooked is the cost of transaction and account fees.

Trading costs can considerably affect your profitability and should be a major consideration for all types of traders. Doing a little bit of research into the brokers fees will prevent even someone who trades once or twice a month and pays an account maintenance fee, or a live price fee from being worse off at the end of the year.

Brokers typically make their money from a couple of different charges:

  • Account Fees
  • Brokerage
  • Spread
  • Funding charges
  • Live price feeds

Account fees

The most annoying of all the fees that a broker may charge because it is effectively an administration charge for you to be a customer. They are sometimes termed as an inactivity fee, and no one likes to be “taxed” for doing nothing on their account. There is very little justification for charging an account fee, and it goes straight to the bottom line. They may try and mask these fees as a compliance cost, but these are fixed costs which any business incurs. Start looking around!

Brokerage

Brokerage constitutes the major portion of the fees that a trader pays on their trades and is directly proportional to the size, or notional value, of the position taken. The broker charges a percentage of the value of the trade, and these typically range between 0.1% and 0.5% on both the entry and exit of a trading position. If you were to liken this to buying a Coke, would you pay 5x as much for the same product? It may be served in a swankier glass at one establishment, but is it worth 5x as much?

This is where traders can make the most significant savings on their trading account, irrespective of whether you are profitable or not with your decision making.

Imagine if you are an active trader and trading 10 times a week. If each one of the trades taken has a notional value of R100,000:

No. of Trades Volume Broker A (0.1%) Broker B (0.5%)
520 R100,000 R100,400 R520,000

Now why would you pay 5x the cost for the same trades? I am sure there are better things you could do with R400k!

Spread

Some brokers, like Blackstone Futures, only charge the spread when opening and closing a trade. The spread is the difference between the buying (bid) and selling (offer) price of a market and any commissions or brokerage is included in the spread. The advantage of this is that you can see exactly the price you enter and exit at and there is no additional line item (commission) which will reduce the profitability of the trade. For novices and experts alike, this makes it very easy to see what you have made or lost on a trade.

The commission of 0.1% is wrapped around the market spread and the price you see is the price you get. Many of the markets, like indices and FX have narrow, fixed spreads and this has enormous advantages, especially in volatile conditions.

Funding charges

Funding charges or swap fees as they are commonly known, are effectively the cost of borrowing. When trading a leveraged product like a CFD or spread trade, your outlay is only a small percentage of the capital you wish to be exposed to. This ranges from 0.5-25% depending on the liquidity of the instrument and the rest you borrow from the broker. Brokers will charge you a fee for holding your positions overnight. If you hold a position for several days or weeks, then these costs can mount up so ensure your broker is charging you fairly.

Live price fees

One of the ways exchanges generate revenue is to charge the end uses for seeing their live price feeds. One can access a 15-minute delayed feed for free, but this does not assist a trader who trades frequently within the same day.

Some brokers will recover these costs by “passing” them on to their end clients, but this is not something that you should be paying unless you require depth of market. Depth of market shows the best buy and sell orders available and mostly used by very experienced traders or institutions.

This is by no means an exhaustive list and traders should be very mindful of the amount they are paying to “buy the same Coke”. We are easily influenced by something that is perceived to be the best or been around the longest, but they often use that reputation to charge you more for doing the same job.


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