Wednesday, February 29, 2012

The Cost of Commissions

When investing the very first things you need is an account with a stockbroker and an idea.  These are today, generally, free.  After that, you start paying.

In order to buy shares of stock, brokers charge a commission, or fee.  Rates of commission vary between brokers for reasons that have nothing to do with anything related to the actual purchase of stock. You can pay $7 at Scottrade, $8 at Fidelity or $8.95 at Schwab for the exact same service. 

You pay this commission every time you buy or sell transactions.  For instance, if you want to buy a share of Apple Computer from your Fidelity broker, you will pay the price of the stock, currently $425 plus $8 commission.  If you buy 10 shares, you will pay $4,250 plus, still, an $8 commission.  If, after a time, you decide you don’t want to own your share of stock, you less it at whatever the market price is less another $8 commission. 

If you sell the stock at $425, you have paid $16 to your broker for the privilege of holding the share, which you made no money on.  You started with $425 and now have $407.   It is important to note here that $16 would have bought you a large pizza and your choice of beverage.  The good news is that the broker will now be able to now be able to buy that pizza for his family. 

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