Do you know why we love October?
(Cost to Invest)
October 2, 2020 by The Q.ai Team
The educational portion of this newsletter focuses on the cost to invest
Uh, no, not exactly. It’s the start of Q4. It’s a time when you can reflect on your year (lol @ 2020). Goals = Realities – or failures, depending on how you look at it.
If you’re ready for the latest season of Black Mirror to come to an end, you’re in luck because it will soon enough. So set some goals for Q1, jot down a list of some stuff you’re thankful for, take a nap and freak everyone out by religiously drinking an Apple Pie Spice latte instead. Plus, the way the leaves die is so beautiful.
This Week’s Biggest Headlines
- September jobs report came in this morning. 661,000 jobs were added – the lowest number of job gains since May. Analysts look at the number of jobs added each month as a way to measure how fast our economy is recovering. A lower amount than previous months is a sign that the recovery could be cooling down. Read more.
- The $2.2 trillion stimulus bill was passed by the House last night. This bill will include unemployment benefits and direct payments. Don’t get too excited yet – it likely won’t get passed by the Senate. We bring up the stimulus bill every week is because (1) Every week it’s a different bill, so technically it’s fresh news
and (2) The stimulus is a source of optimism for investors, and many view the market with less pessimism if there’s a possibility that a new stimulus is on the table. A stimulus has been a major market mover, affecting even intraday trading. Read more.
- Another component of the stimulus is extending the paycheck support program from the CARES Act, which expired on October 1. Without it, people who work in the airline industry are at risk of massive layoffs – possibly the worst in history. Read more.
- Crocs > real clogs. Remember when Crocs weren’t cool? Well, now they apparently are flying off the shelves. The missing piece to an unbreakable marketing strategy?
Glow in the dark charmsCollaborating with Bad Bunny, an objectively cool celebrity. Within minutes, the $64.99 pair of Crocs were sold out and posted on 3rd party reseller sites for over $200. As if 2020 could not get any more unpredictable. Read more.
- As expected, September sucked for the stock market. At one point, people were calling it “the worst September in nearly 2 decades.” Although stocks did rally during the last few days, the turbulence isn’t over yet. October isn’t usually much better for markets and investors are all too familiar with this classic one-two punch. However, it has been found that when markets are hit with a September as severe as the one we just survived, there’s a 70% likelihood that October will outperform its typical expectations. Read more.
Does that mean we’re off the hook for the rest of 2020?
Probably not. This year comes with extraordinary circumstances that are hard to ignore. The obvious things come to mind… We’re in the worst recession of the last century. COVID-19 hasn’t gone away (and is in fact making a surprise appearance in places that previously had it under control). Unemployment remains an issue. But also, we’re entering prime election season.
Why does that matter?
Historically, election years have led to higher volatility in the U.S. and global markets – because markets hate uncertainty. Investors don’t know what the future holds, so as a way to protect themselves against an election result that hurts markets, many end up selling off shares or moving their assets into more stable investments, such as gold.
Additionally, if an election result is contested, analysts worry that markets will take a serious hit. One analyst from JP Morgan Chase pointed out that “how the market responds to the election depends less on which candidate wins and more on how conclusive the result is.”
That you need to spend a lil money in order to make a lil money
When you start investing, there are several types of fees to familiarize yourself with so you’re not caught off guard. Depending on the type of investments you select, you may pay flat fees, commissions, per-trade charges, or an expense ratio on a whole account. Furthermore, you should watch out for not only exact dollar amounts, but differences in percentage fees on your account, as even 1% can add up to tens of thousands of dollars over your lifetime.
The Cost to Invest
Investing used to be a rich man’s reality and a poor man’s dream – but no more. With a few dollars and a little know-how, it’s possible for anyone to make their stock market dreams a reality. That being said, you still have to know where to start.
Many individuals jump straight into researching their future investments, but just as importantly is how much you’ll need to get started. It’s one thing to want to purchase $1,000 worth of stocks your first go; it’s another to learn you’ll actually be spending closer to $1,100 after brokerage fees.
In this section, we’ll cover the cost to start investing – as well as the true cost of some of your investments over time.
What are My Investment Options?
Before you know how much you’ll spend, you have to decide where you want to spend it. Depending on your goals and comfort zone, there are a few routes you can take to get started, each of which will affect your initial and lifetime costs in different ways.
Robo advisors are one way to invest without doing it alone. This type of investment tool uses algorithms and AI to determine the best portfolio for your situation. These systems can even take into account financial goals, risk tolerance, and your investment time horizon to make the best possible decisions.
Full-service brokers are the most expensive option when it comes to investing. As a result, they typically only deal with high net worth clients (i.e. rich ppl), as some firms set their minimum deposit at $25,000+. For this price, they offer a full range of services and financial advice, including:
• Retirement accounts
• Estate planning
• Healthcare accounts
• Trading in stocks, ETFs, and mutual funds
• Exercising more exotic trading options (pun intended)
Usually, full-service brokers work by charging commission on your transactions in addition to charging a percent of the value of your assets. Some may also impose an annual fee equivalent to a membership charge.
Full-service brokers justify their higher expenses by hand-tailoring your accounts to your situation. However, this does not mean they’re the most cost-efficient, as their higher fees will cut substantially into your potential profits over time.
Discount brokers are the new normal for many who can’t afford the exorbitantly high fees of a full-service operation. These online brokers may allow you to make commission-free stock trades, though they’re likely require for more advanced financial transactions.
Some discount brokers have minimum deposit restrictions, ranging from $100 to $1,000 or more. These are usually quite low compared to full-service operations. Some accounts don’t require minimum deposits, but they make up their losses by charging other fees (everyone wants their money, after all).
Other brokers may lower their costs – such as trading and account management fees – if your balance rises above a certain threshold. This encourages you to invest more, which hopefully means that everyone makes more money in the long run.
However, with great freedom (and cheapness) comes great responsibility. For instance, you not only have to buy and sell on your own terms, but you don’t have personalized advice from an expert. This means you have to do your own research and make selections based on your best judgement.
That being said, often times these brokers publish free educational materials for their investors. This can help you get started with all the tools you need to make (hopefully) wise decisions on your own.
So, What Does it Actually Cost to Invest?
The short answer is that it varies. The long answer:
- Full-service brokers tend to charge 1-2% of a client’s managed asset
- Some also charge various commissions and fees per transaction to cover the costs of trading. This can amount to hundreds of dollars in a single trade, depending on the worth – and amount – of the stocks you buy.
- For brokers who service smaller investors, there’s typically a small commission charge on every trade, both buying and selling. These fees range anywhere from $2 to $10 per trade with a discount broker.
Note: online brokers charge such fees per security. That means if you purchase ten shares of one stock, your broker will charge you for one trade. But, if you purchase one share of ten stocks at once, your broker may slap you with ten separate charges (how rude!).
And, if you decide to sell these shares anytime soon, you’ll be charged again for exiting your positions (also rude!). Therefore, if you trade frequently, you risk losing more of your investment than you earn in interest, even if it doesn’t initially look like it.
*~Let’s Play Pretend*~
So! You’re finally ready to invest. Let’s say that you decide to throw your first $1,000 into ten different stocks with the best discount broker in town. Let’s also assume that because you chose a legit broker, your commission per trade comes to $10.
Because you’ve decided to purchase one share of ten different securities, you’ve lost $100 of your investment on your first day – $10 per trade times ten trades. This means that your account is already reduced to $900 after costs, which comes to a 10% loss before you’ve had a chance to earn a penny.
In order to make up the difference, then, you’ll have to earn 10% on your investment in order to break even.
Now, let’s say that you keep your stocks for 90 days and see no change in price whatsoever. While you haven’t lost money in the market, you haven’t gained anything either.
Rather than continuing to tie up your funds, you decide to pull your $900 out of the stock market. In doing so, you immediately incur another $100 in fees to your broker (That $10 per-share cost is really starting to bite!).
Since your investments effectively didn’t earn any interest in the market, you’ve lost $200 through the normal process of entering and exiting your positions. Effectively, you have lowered your investment capital to $800 just by paying trading costs – a 20% loss of your initial deposit.
This example is one of many you can find on why day trading can be a highly costly and ineffective way to capitalize on your capital. It also shows why beginning traders should look to invest in securities with a higher probably of earning – and do so through trustworthy brokers with lower fees.
Types of Fees to Expect
Unfortunately, there is no “one size fits all” answer to how much it will cost any particular person to invest. However, we can prepare you with a list of the fees you’re most likely to encounter as you begin your investment journey.
General Trading Fees
- Minimum deposit: This amount is the bare minimum a broker will accept if you want to trade under their service. Depending on the broker, this fee can range from $0 to $10,000 or more.
- Commission: Commission is a percentage taken off the top by the broker. Many brokers charge according to the total assets under management, while others may charge per new contribution. For a full-service broker, these charges average 1-2%.
- Stock trade fee: These may be flat or share-based fees. Flat fees are more common; this means that your broker charges a single price regardless of which stock or how many shares you purchase. Share-based fees charge per share traded (this method is common with day trading brokers).
- Broker-assisted trade fee: Brokers who operate over the phone often charge their own fees – note that this is not the same as a robo-advisor. These brokers usually work with clients who don’t have or want access to the internet or who want to deal in specialty shares.
Mutual Fund Fees
Mutual fund trade fees: Mutual funds may be traded online or via phone. Depending on the type of fund you plan to trade, you may have no trade fees on the condition that you keep the fund for a set amount of time. Others may charge commission or flat rate fees.
Additionally, watch out for ongoing fees such as:
- Front-end load fees: Investors pay these fees upon purchase of mutual fund shares
- Back-end load fees: Brokers charge these fees when you cash out of your fund
Option Trading Fees
There are several fees associated with trading options. You may encounter:
- Base fees: A flat rate per trade
- Per-contract fees: These fees are typically structured as commissions on the whole contract, of which there may be several tiers
- Exercise fees: Many online brokers charge a fee for exercising, rather than closing, your option(s)
- Assignment fees: Assignment fees are typically charged to clients who have an option automatically bought or sold based on certain conditions
There are other fees as well based on the specific firm and conditions of the trade. Getting familiar with these most common fees is a good place to start.
Is It Possible for Me to Owe Money?
Believe it or not, it is possible to owe money to your brokers. Typically, you’ll sign paperwork to counteract such possibilities, but the conditions of such contracts may still allow for some loss.
This possibility primarily comes about via margin accounts. Things to note:
- A margin account is essentially a loan from your broker to cover part of your stock purchase
- Investors open a margin account to trade forex (foreign exchange markets)
- It can also be used for shorting a stock, which could lead to an investor owing money to the broker to cover the broker’s losses
- Most brokers recommend or require that investors sign a stop order on margin accounts, meaning if things don’t go your way, the stock will be automatically sold or returned to the lender to prevent further losses.
While an investor in this situation may still end up owing some money to the broker to cover losses, a stop order will prevent the investor from losing their life savings on a bad call.
The Bottom Line?
Yes, investing comes at an upfront cost. But, if you play your cards right, you can get away with paying very little. Don’t let this deter you from getting some skin in the game! And thanks to the reckoning that Robinhood created with its 0% commission trading model, there are now so many options out there to choose from.
This episode of Talking Points features journalist and New York Times bestselling author Jennifer Lapin, a finance expert who grew up knowing absolutely nothing about personal finance. She rewrites the financial dictionary in the back of her books and refers to finance as a language that we don’t have a Rosetta Stone for. She’s a living, breathing testament to the notion that you don’t have to come from a finance-heavy household in order to be good with your money.