This article will explain how to reduce trading fees in options and stock trading.
Let’s say you’ve finally made it. You’ve stayed disciplined, stuck to a trading plan, and managed to create a profitable trading business.
But trading fees are eating into your trades, even your losing trades, adding insult to injury.
So how can you reduce trading fees? The great news is that it is getting easier everyday to lower your trading fees with brokerage firms lowering and even elimiating commissions altogether. Keep reading to learn more.
Stock Trading Fees Explained
A stock trading fee or trade commission is a per-share or per-trade fee that is charged to you every time you buy a stock or option.
Some brokers charge additional fees, including annual fees, research subscription fees, and others. But with competition pushing down the cost of trading, most brokers have eliminated these extra fees. If you are a trader rather than a long-term investor, the trade commission is the only fee you should be paying.
Use a Zero Fee Broker
Probably the best way you can lower trading fees is to use a zero fee broker like Robinhood or Charles Schwab. This type of broker sells retail trades to market makers “off exchange,” allowing market makers to avoid the fees of the NYSE or other exchanges.
This practice allows the retail trader to make trades with no commission at all.
Keep in mind though that “zero commission” brokers may not be completely free.
Supporters of the practice say that these brokers make money off lending to margin-traders and earning interest on their customers’ deposits. According to this view, the practice of not charging commission is simply a strategy to entice customers into paid services.
But critics argue that these brokerages face conflicts of interest that may be leading them to overcharge customers. In other words, the customer may be getting zero commission, but the prices of the assets they buy may sometimes be higher than they would be from other brokerages.
Brokers are legally obligated to give customers the best price. And so far, no major zero-commission brokerage has been been found in violation of the law in this respect so maybe the critics are barking at nothing.
So if you don’t agree with the critics of zero commission trading, you may want to use one of these brokerages yourself. Or if you think the critics are right, you may want to avoid this type of brokerage.
Here are some other options.
Use a Per-share Price Structure
If you generally make small trades, using a per-share price broker may be a way to cut down on fees. These brokers charge a small commission per share instead of a fixed price per trade.
Per-share broker fees can add up quickly if you take out large orders. But if you only buy a few shares at a time, using this type of pricing can be beneficial.
Interactive Brokers is one example of a per-share price broker.
Use a Fixed Price Broker
If you are on a per-share pricing system and find that you are making large orders, you may find that switching to a fixed price broker helps to reduce fees.
In a fixed price system, traders get charged the same commission no matter how large their orders are. Regardless of whether you buy $20,000 worth of stock or $200,000 worth, your fee is the same.
This means that if your order is larger, the commission you pay is a smaller percentage of the amount of the trade. For traders who don’t scale in and out of positions often, and have large trading accounts, this may help to cut down on fees when compared to a per-share system.
Most major brokers offer fixed pricing as the default pricing model.
Use a Direct Access Broker With ECN Routing
Most traders are “liquidity takers.” They place market orders, not limit orders.
This is because most traders do not have a large inventory and are not interested in becoming market makers.
But if you are willing to trade using limit orders, you may be able to save on fees by switching to a direct access broker with ECN routing.
Some brokers with this option allow you to earn rebates for placing limit orders. These rebates may significantly reduce or even eliminate the total cost of trading fees.
Shop Around for Low Trading Fees
Again, trading fees are getting lower every day. If you’ve used the same broker for a while, you may want to shop around and see what else is available. If you find that lower-cost brokers don’t offer the same features you want, you can always stick with the one you’ve got.
But it doesn’t hurt to research alternatives or even to try them out.
Or, maybe you’re lucky enough to be using a broker who has just begun providing no fee trading, which seems to be on the rise.
Avoid Over Trading
Another way to reduce trading fees is to avoid over trading. Over trading often happens when a trader has some losing trades, and then tries to make up for them by trading over and over again in the hopes of making up for these losses. Even if some of the subsequent trades are wins, this practice can result in high commissions that eliminate all of the gains from these trades.
At other times, traders may be better off waiting for longer term, bigger gains than scalping. This will be determined by your trading style and trading account size.
In most businesses, the producer earns more by doing more work. And as human beings, we are wired to believe that doing more will make us more successful. But in trading, the belief that “I need to do more” can be detrimental.
The best way to avoid over trading is to remind yourself that you cannot force the market to hand you wins. Either there is an opportunity or there isn’t. If there is no viable opportunity, doing nothing is better than doing something.
Account for Trading Fees in Evaluating Trades
Even if your broker has low trading fees, you may still end up paying too much if you don’t factor in these fees before placing a trade.
If you find that the risk/reward ratio for a trade is only barely good enough to justify entering it, calculate the fees you will pay should the trade go well. In some cases, this may cause you to not make trades you otherwise would have made. This will not only cut down on trading fees, but it will also help you avoid over trading.
Your CPA will also thank you for less trading.
No Trading Fees Great for Option Strategies
The great thing about all this competition driving trading fees lower is that traders can now do multi leg spreads without having to incur high trading fees.
For example, some traders buy put and call options on the same stock. The idea behind this strategy was to profit from volatility. It didn’t matter which direction the stock’s price went, as long as it went far enough in one direction or another to be a winning trade.
But the problem with this strategy was that traders had to buy two options instead of one, which doubled the trading fees on the position. This caused some trades to be unprofitable just because of the commission.
With trading fees falling or even going to zero, this is less of a problem than it was in the past. And this has opened up more flexibility for traders as they attempt to find profitable opportunities and use spreads to lower trading risk.
This article has explored how to reduce trading fees. We’ve gone over some common types of fees. And we’ve discussed how to reduce commissions by switching to a per-share price, fixed price, direct access, or zero commission broker. We’ve also discussed some additional strategies for lowering fees, including taking account of fees when placing trades and avoiding over trading.