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Golden Rule #5
Especially If You Trade Actively, Reduce Your Commission Costs To The Bone
Most investors often ignore or underestimate how much of an impact broker commissions can have on their final results.
Consider this scenario: You're not a buy-and-hold investor. But you're not an active trader, either. Starting with $100,000 in your brokerage account, you buy 20 different securities, with an average initial value of $5,000 each. Then, you buy and sell each one only twice a year, with an average profit of 5% per trade before commissions. With consistent profits like those, you'll retire rich, right?
Not necessarily, according to our regular surveys of the commissions charged by the 600-plus brokers we rate.
If you're paying top-dollar commissions (actually charged by 27% of the firms rated by Weiss Ratings), your entire $100,000 will be totally wiped out by commissions by the end of year nine. Why? Because although your trading is consistently profitable before commissions, after commissions you will actually lose money every year, until every single penny in your account is gone — all into your broker's pocket.
You can avoid disaster simply by using a broker who charges you the average commission rate among the brokers surveyed by Weiss Ratings. That's what most investors like you are doing today. But, assuming the exact same scenario with the exact same profits, the results are still very disappointing. All you'd make is a meager $21,675 in profits. And that's after 10 long years, with every single trade profitable and with reinvestment of profits at the beginning of every new year.
The only way to make good money in the market is to find brokers with commissions on the low end of the scale. Instead of just $21,675, you'd walk away with $108,374 in pure profits to you, after commissions. In other words, just by switching from your average commissions to low commissions, you'd multiply your profits by nearly five times.
There are hundreds of securities brokers offering a wide range of commission rates, and we cannot list them all here. But to give you a head start in selecting one that suits your needs, we have listed the major retail brokerage firms and the commission rates they charge, based on our most recent survey of the firms. Although commissions alone should not be the only factor that you consider when selecting a firm, it certainly can be a very critical factor when you trade actively.
| Name |
Service
Level |
100
shares @ $10 |
100
shares @ $100 |
1,000
shares @ $20 |
| A
G Edwards Inc |
Full
Service |
46.00 |
100.00 |
400.00 |
| American
Express Financial Advisors * |
Online |
19.95 |
19.95 |
19.95 |
| Ameritrade
Inc * |
Online |
10.99 |
10.99 |
10.99 |
| Banc
of America Securities LLC * |
Online |
24.95 |
24.95 |
24.95 |
| Bear
Stearns & Co |
Full
Service |
50.00 |
100.00 |
424.00 |
| Charles
Schwab & Co Inc * |
Online |
29.95 |
29.95 |
29.95 |
| Credit
Suisse First Boston LLC |
Full
Service |
50.00 |
100.00 |
405.00 |
| E*Trade
Securities LLC * |
Online |
9.99 |
9.99 |
9.99 |
| Edward
Jones |
Full
Service |
50.00 |
100.00 |
392.50 |
| Fidelity
Brokerage Services LLC * |
Online |
32.95 |
32.95 |
32.95 |
| Fleet
Securities Inc * |
Online |
19.95 |
19.95 |
19.95 |
| Legg
Mason Wood Walker Inc |
Full
Service |
70.00 |
125.00 |
400.00 |
| Merrill
Lynch Pierce Fenner & Smith * |
Online |
29.95 |
29.95 |
29.95 |
| Morgan
Stanley DW Inc * |
Online |
29.95 |
29.95 |
29.95 |
| Quick
& Reilly Inc * |
Online |
14.95 |
14.95 |
14.95 |
| Raymond
James & Associates Inc |
Full
Service |
45.00 |
95.00 |
417.00 |
| Salomon
Smith Barney Inc |
Full
Service |
50.00 |
110.00 |
499.00 |
| TD
Waterhouse Investor Service Inc * |
Online |
9.95 |
9.95 |
9.95 |
| U.S.
Bancorp Piper Jaffray Inc |
Full
Service |
60.00 |
115.00 |
436.00 |
| UBS
Painewebber Incorporated |
Full
Service |
54.00 |
110.00 |
440.00 |
| Wachovia
Securities Inc * |
Online |
11.95 |
11.95 |
11.95 |
* Firm also offers discount and full service trades at higher commission rates
One final word: Don't expect perfection. It is rarely possible to apply every golden rule in every situation. However, prudent investing and prudent risk-taking will almost invariably outperform imprudence in the long run.
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