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[G] Investing (part 4)

Blogs > azndsh
Post a Reply
azndsh
Profile Blog Joined August 2006
United States4447 Posts
November 26 2010 22:08 GMT
#1
Understanding Costs
Trading has gotten a lot cheaper and more accessible over the years, so that even people like you and I can make investments without getting eaten up by fees. Still, most people don't even realize that they're losing money to these things.

Commission
This is most likely the largest portion of costs for most people. If you trade in $1000 positions, and each position costs $8 to put on, then you're paying 1.6% to enter and exit each position. This may not sound like a lot, but depending on how often you trade, it does actually add up to a huge amount. Try to find the cheapest brokerage you can.

Taxes
No idea what laws are for other countries, but in the US, you're taxed on your ordinary tax rate for positions that you hold for less than a year. On the other hand, losses can be deducted. For positions that you hold for more than a year, there's a lower, capital gains tax. It makes a pretty big difference, so do your research.

Fund fees and expenses
If you're interested in mutual funds and ETFs, it's important to check how much the fund takes out in expenses and management fees. Morningstar is a good place to look stuff up. Depending on how long you plan on holding it, something like 1% a year really adds up over time.

Bid-ask spread
Let's take Citigroup (C) as an example stock. Say it's trading at 4.11-4.12. That means you can buy at 4.12, but you can only sell it at 4.11. That's a penny loss, which comes out to about 0.24% in this case. It's minor but relatively important to keep in mind for less popular things. The spread can be much wider, especially if you're putting on a larger position, and you should definitely think of that as a cost.

kzn
Profile Blog Joined June 2007
United States1218 Posts
November 26 2010 22:42 GMT
#2
On November 27 2010 07:08 azndsh wrote:
Bid-ask spread
Let's take Citigroup (C) as an example stock. Say it's trading at 4.11-4.12. That means you can buy at 4.12, but you can only sell it at 4.11. That's a penny loss, which comes out to about 0.24% in this case. It's minor but relatively important to keep in mind for less popular things. The spread can be much wider, especially if you're putting on a larger position, and you should definitely think of that as a cost.


I don't understand how this is possible. Isn't the stock market price supposed to reflect the value attached to a share of the stock in question? It doesn't make sense to me that if people are able to sell to me at 4.12, I can't find anyone to sell to except at 4.11?
Like a G6
azndsh
Profile Blog Joined August 2006
United States4447 Posts
November 26 2010 23:12 GMT
#3
If there's someone willing to buy at 4.12 and someone willing to sell at 4.12, then the trades cross until there's either more buyers or sellers. If there are more buyers, then the price becomes 4.12-4.13 because the remaining people are only willing to sell at 4.13. If there are more sellers, then the price becomes 4.11-4.12. For a stock as liquid as Citigroup, there is almost always someone willing to buy millions of shares 1 cent below and sell millions of shares 1 cent above.

I'm not sure what you don't understand. This is pretty much how all financial markets work. The stock market price reflects whatever the heck people are willing to pay for it/sell it at (which in theory should be close to be whatever it's intrinsically worth for whatever that means).

In reality, a lot of trades are probably crossing at 4.115 instead of either 4.11 or 4.12, but that's a whole different ball game that I don't know very much about.
MoreFaSho
Profile Blog Joined May 2010
United States1427 Posts
November 27 2010 00:41 GMT
#4
On November 27 2010 07:42 kzn wrote:
Show nested quote +
On November 27 2010 07:08 azndsh wrote:
Bid-ask spread
Let's take Citigroup (C) as an example stock. Say it's trading at 4.11-4.12. That means you can buy at 4.12, but you can only sell it at 4.11. That's a penny loss, which comes out to about 0.24% in this case. It's minor but relatively important to keep in mind for less popular things. The spread can be much wider, especially if you're putting on a larger position, and you should definitely think of that as a cost.


I don't understand how this is possible. Isn't the stock market price supposed to reflect the value attached to a share of the stock in question? It doesn't make sense to me that if people are able to sell to me at 4.12, I can't find anyone to sell to except at 4.11?

Think of it like buying a bike from the store. The store sits there all day and most of the time people are not buying the $100 bike for $100, they're not buying at all, but if you buy your bike for $100 you shouldn't be surprised that you can't immediately sell it for $100 without waiting quite a long time and taking a risk that the value of the bike will go down over time.
I always try to shield slam face, just to make sure it doesnt work
itzme_petey
Profile Blog Joined February 2004
United States1400 Posts
November 27 2010 08:25 GMT
#5
Not sure if this qualifies as a "cost". Down-ward volatility drag "downward bias" factors into the value of levered ETFs or inverse derivatives. Lets say the ETF goes down 20% one day and then up 20% the other. You have just lost $.04 in value if the ETF was $10 to begin with.

Here is an interesting article about levered and inverse ETF's. Since ETF's arent all safe and some are down right gambling tools.

Levered/inverse ETF's downward bias
"Last night, I played a game.. as I recall it was a strategy game.. Peeked around and what did I see, a girl playing starcraft better than me.. and I jizzed in my pants.."
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