Stock trading has become less expensive, thanks in large part to advances in telecommunications technology. You can sign up for an online brokerage account and trade for as little as $5 per order. However, you will incur commissions on both the buy and sell sides of each trade. This means that if you are an active trader executing several trades during the day, the commissions could add up and affect your overall investment profits.
Get the commission schedule for your brokerage, which should be on its website. Full-service brokers may charge you a flat fee to manage your assets, or a combination of management fees and commissions, which are usually high because you are getting investment advice as well as trade execution. Discount brokers do not offer investment advice, which is why they can charge these low commissions and still make money.
Select an order-entry method because that determines the commission rate. Discount brokers typically charge between $5 and $20 for an stock trade, regardless of the share price and the number of shares. Brokers may also offer touch-tone telephone and broker-assisted trading, which have higher commission rates. However, the days of commissions based on share price and quantity are mostly over for online brokers.
Calculate the commission costs per trade. For example, if your broker charges $9.95 per online trade, your commission costs to buy and sell shares of a stock are $19.90 ($9.95 x 2).
Find out if you have to pay additional fees and charges. For example, low commission rates may apply only if you execute a minimum number of trades or have a minimum portfolio balance. If you trade on foreign stock markets, such as Tokyo or London, your commission costs will be higher.
Estimate the profit or loss for each trade. It is the difference in the buying and selling stock prices minus commission costs. Continuing with the example, if you buy 100 shares at $20 each and sell them at $22 each, your profit is $200 [100 x ($22 - $20) = 100 x $2] minus commission costs of $19.90, or $181.10.
Brokers make money in different ways. If you have a margin account, you pay interest on the funds you borrow from the broker. Clients may trade options, mutual funds, bonds and other products, which generate additional commissions for the broker.
Pay attention to the bid-ask spread, which is the difference between the offer and asking prices for a stock. If the spread is too high or the market is very volatile, place a limit order stipulating an exact price.