How much thought should investor give to the cost of commission when deciding to buy or sell in the short trm?
An Anonymous User asked:
How much thought should investors give to the cost of commissions when deciding to buy or sell in the short term? What about the long term? Why? (I’m writing a business report on stock. [Buying, selling, what companies to invest in, stuff like that] and I just need some help. Thank you for any answers you give.)
I used to be a stockbroker a long time ago.
Way back in the 1970s and prior, the brokerage industry was regulated by the Federal Governement. Well, actually it still is, but along with the old regulation was the fact that the Feds had to approve the prices that brokerage firms charged their clients for transations, like commissions. Deregulation finally came and then discount brokerage firms popped-up. One of the first discount brokers was Charles Schwab & Co..
You see, back in the old days, ALL the firms used to charge the exact same commission. It didn’t matter if you bought or sold stock through Merrill Lynch, Paine Webber, Prudential Basche, Dean Witter Reylonds or whoever…you paid the same amount everywhere…and the prices were rather HIGH!
I think to buy or sell 100 shares of a $25 stock ($2,500 in stock), the commission was about $80. That’s a pretty fat price, especially when you realize that folks back in 1979 were probably earning about $16,000 a year at a “good job”.
Also, if the stocks price was higher, you paid more…or if you bought more shares you paid more. The brokers basically had charts at their desks that shows how much the commission was to buy/sell different number of shares and different prices per share. I think that 200 shares of a $25 stock would cost about $120 for the trade.
When the brokerage industry was deregulated (that is, free to set their own transaction prices charged to clients), discount brokers like Schwab lowered their rates by more than half. In the early 1980s, to buy or sell the same 100 shares of a $25 stock, the commission would be about $40 through a discount broker. (Half the price of a so-called full service broker.)
Today, with the internet and new technologies, the commission costs of buying and selling stocks is ridiculously low. Most places charge a mere $6 to buy or sell ANY amount of stock at ANY price.
So, to answer your question as I see it. The cost used to be rather prohibitive many years ago. But, first through deregulation and then through advancements in technologies, the cost of buying and selling commons stocks is relatively chep.
Oh…and let’s do the math here….
100 shares at $25 a share in 1979 was $2,500 plus $80 commission.
$80 / $2,500 = 0.032 or 3.2% in commission costs
100 shares at $25 a share in 2009 is $2,5000 plus $6 commission
$6 / $2,500 = 0.0024 or less than 1/4 of 1 percent!
I could literally write a book about what people *think* happens at a brokerage firm and what actually goes on there.
IMO…there are a lot of variables that go into what you ask. The liquidity of the stock (how easy it is to buy or sell), where the stock is traded, and most importantly what type of profit the investor is looking for.
Many major houses now days charge a flat rate of NASDAQ and NYSE traded stock, but pink sheet , OTC, and penny stocks may cost more (based upon liquidity). I think NASDAQ has the 5% rule (commission should not be more that 5% of the transaction).
Most savy investors have a window of opportunity (a purchase price, a selling price and how long to hold the stock).
In general, the shorter the term, the more the commission comes into play. This is also offset by the anticipated gain the investor is looking to realize as well. If a stock runs 15 points in one day then commission would be less of a factor.
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