Those “hidden” fees when you executed a trade

By: ispeculatornew
Date posted: 08.07.2009 (4:00 am) | Write a Comment  (2 Comments)

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nohiddenfeesAll too often, when retail or even institution investors execute on the market, they get to pay a lot more fees than they are being told, an unfortunate but true reality. Over an investment lifetime, these fees can add up and make a major difference in your end net worth. In this post, I will go over a few of these, you can see for yourself if you are getting “screwed” or not.

Liquidity costs

When executing trades, investors use the “market order” too often and it can end up costing a lot of money. If you enter a trade at market order (rather than entering a price order), you are basically telling your broker to buy or sell the position no matter what the price is. Of course, the broker is being paid only if the trade is made so he will make sure to get the trade done, even if market conditions are bad. You could end up paying a lot more than you should.

Front running trading

A major source of controversy in the past few weeks has been the extent to which firms such as Goldman Sachs are believed to be front running. What is it exactly? Suppose Goldman Sachs knows, for even a tenth of a second, that investors want to buy 10M Microsoft shares. Goldman could simply start buying the shares in front of everyone and once those investors come in to do their trades, Goldman could sell those stocks at a penny or two higher. Not much of a difference you’ll say…but these fees add up. Of course, this is illegal and it is not quite clear what brokers are doing and to what extent, but we can assume that some of this going on, at Goldman or elsewhere

FX trading

So you have a brokerage account in $CAD and decide to make a purchase on US markets. Guess what? Your broker is going to make a good spread on your fx trade. They will charge you the standard commission and will then convert it to $CAD using a rate that gives them a little extra money in their pockets…

Costs to enter or exit positions

In many products such as mutual funds as well as structured products, you can find small print that will give you the exact breakdown of costs when you initially buy and then sell your position. These can add up very quickly…

Conclusion

No matter how you trade, you will be paying commissions. However, it is very important to look at the details of the fees you are paying. These can add up very quickly, especially if you are fairly active in your trading.

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2 Comments

  1. Comment by OneDay — August 7, 2009 @ 8:16 am

    Great post!

    Some can have an advantage of 20 milliseconds!!! And front running is being watched by financial regulators for ages by now… How could they build a system which breaks the law in so obvious manner?!?

  2. Comment by Zavi — August 7, 2009 @ 8:27 am

    It’s no secret that stockbrokers make money when you trade! Be careful of discount brokers. Commissions can be cheaper, but some are trying to push customers to trade actively by charging inactivity fees to customers who don’t trade frequently enough!!!!! Also some are charging for paper statements and confirmations.

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