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You may have relatives or friends who trade the markets. They could be trading shares, futures, options or forex. You may have heard of their exciting trading stories and perhaps this aroused your curiosity and you wondered whether you should trade too. One of the first questions you ask before you trade would be: what are the costs of trading.
The costs of trading depend on several factors, including the instrument and market you are trading. Most of the costs you pay are to your brokerage firm. They need to make a living in exchange for the services they provide.
Generally, you would expect to incur the following costs:
Commissions
Slippage
Spread
Platform Fees
Expenses
Commissions
These costs are charged by brokers. The commission you pay is usually calculated as a percentage of the size of your trade. For example, if you are buying or selling $10,000 worth of shares, your broker may charge you 1% of that. They may also charge in tiers: for example, if you are buying or selling shares with a total market value of less than $10,000 then your broker may charge you $30. If it is under $20,000, they may charge you $50. Therefore, if you bought $5,000 worth of shares, you would still pay $30 commission. And if you bought $12,000 worth of shares you would still pay $50 commission.
Slippage
The price of a commodity is always moving as long as the market is open. Therefore, if the price of a share is quoted at $10 now, it does not mean that when you decide to buy, you will buy those shares at $10 each. When you put in your order and it gets filled, the market price may have already changed. If your order to buy the shares was filled at a price of $10.25, and you bought 100 shares, then your total slippage cost is: $25 (that is 100 shares * $0.25). If you had the same slippage when you sell, then the entire slippage costs for you getting in and out of the market would be $50 (that is $25 * 2 trades).
Spread
The spread is the difference between the bid to buy and offer to sell for the commodity. If the most eager buyer is willing to buy US Dollars for 0.7500 Australian Dollars each, but the most eager seller is only willing to sell them for 0.7510 Australian Dollars each, then there is a spread of 10 pips. These 10 pips are referred to as the spread. If you bought 100,000 USDs, the spread would cost you 100 Australian Dollars. (Pips are discussed further in the book: The Part-Time Currency Trader .)
Platform Fees
Some brokers charge you monthly for using their trading platforms.
Expenses
These costs include those associated to your trading education like buying books, trading software, data subscription and so forth.
Some people may 'brush' these costs aside as negligible costs of having fun, much like the coins they put in poker machines. However, if you want to look at trading as a business, you have to minimize them and make sure you are getting the most for every dollar you spend to ensure your long-term survival.
