InvestorQ : Can you explain all the costs associated when I am trading in equities?
priya Shah made post

Can you explain all the costs associated when I am trading in equities?

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Anushri Vasa answered.
2 years ago

First, is the plain brokerage cost! There are discount brokers and there are full-service brokers. Choose your broker based on the cost you are willing to bear and the services you expect from your broker. If you are a compulsive self trader then the best you can do is to opt for a discount broker who will give you the least possible brokerage. These brokers will not give you any exciting research ideas but that is anyways not what you are expecting. Keep your brokerage costs at the bare minimum.

Second, is the cost of overtrading! All trading must be done with a distinct purpose. The whole idea of trading aggressively to recover your losses is a bad idea. You only end up getting into sub-optimal trades and adding to your cost of trading without improving your performance. When you overtrading, your capital is being churned, your costs are adding up and your performance is suffering. This is a big cost for traders.

Third, is the cost of liquidity in the markets! Most traders do not sufficiently appreciate this point but ensuring that you do not pay too much in terms of inappropriate spreads is important. The more you trade in second rung stocks with weak liquidity the more you are exposing yourself to liquidity costs. This cost is lower in frontline index stocks.

Fourth is the cost of poor execution. Don’t blame this on the broker, because more often than not poor execution is your doing. When you place a market order in a rising market it is a case of poor execution. When you place a limit order in a sharply falling order it is again a case of poor execution. We normally do not measure it but bad execution imposes a big cost on your trading performance.

Fifth is the cost of inadequate preparation in the market. This takes various forms. You may be fully invested when the market has fallen or you may be sitting on cash when the markets are trending up. This has a huge cost. You may also pay the price of not doing your homework before trading, not reading up the company news and financials and end up with a bad trade. Spend time; even traders need to do their homework.

Lastly, there is the cost of not taking losses on time. Smart trading is all about cutting your losses fast and running your profits longer. Hope is a good breakfast but a bad supper. When you end the day with hope then you could be in for a nasty surprise next day. Learn to take losses as holding on can be awfully expensive at times.

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Devendra answered.
2 years ago

Different trading platforms having different cost.