What a trade actually costs you
The commission is the only cost you can see, and it is usually the smallest one.
Count the full cost before deciding a trade is worth it.
How What a trade actually costs you works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The fee you never see
You buy at the ask and sell at the bid, so you are down the spread the instant you trade. In an illiquid stock it dwarfs any commission you thought you were avoiding.
- 1
The spread is the big one, and it is not on the bill
You buy at the ask and sell at the bid. The gap is a cost you pay instantly and never see itemised. In a mega-cap it is trivial. In a small, thinly traded company it can be several percent, which is more than a year of expected outperformance.
- 2
Then the taxes on the transaction itself
In the UK, stamp duty applies to most share purchases. It is charged on the way in, regardless of whether the trade works out. It makes short holding periods structurally expensive.
- 3
Then currency, if you leave home
Buying a foreign share means converting money, and brokers make a healthy margin on that conversion. Check the FX spread, because it is often larger than the trading commission and it applies both ways.
A 'zero commission' broker is not a charity. Find the revenue line before you assume it is free.
- 4
And finally, tax on the gain, if it works
Realise a profit outside a wrapper and part of it is not yours. That is the cost of the exit, and it is why frequent trading has to be very good indeed just to keep up with doing nothing.
You can total the five costs on a real trade you made recently.
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The commission is the only cost you can see, and it is usually the smallest one.
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