Why trading in small amounts is a really bad idea

Fsp Invest, 18 Dec. 2013

Tags: trading, buying and selling shares, trade volumes, why trading in small amounts is a bad idea, how much should you trade, trading costs, how to minimise trading costs



You often hear of private investors who buy and sell really small rand value amounts of shares. And they wonder why they keep losing money… Today, we’d like to show you just how damaging small trade volumes can be to your wealth.


Why you actually LOSE money by trading in small amounts
Let’s compare the strategies of two investors. 
 
John and Paul both like Standard Bank and decide to invest. 
 
So John phones his broker and buys R10,000 worth of shares in Standard Bank. A short while later, he receives a transaction summary showing what he bought and also the costs of the transaction. 
 
Now the trading costs involved in any transaction are not small. 
 
Let’s take a closer look at what those trading costs are... 
 
You’ll pay a brokerage fee, Securities Transfer Tax (STT), STRATE, Investor Protection Levy (IPL) and on top of all that, you’ll also pay VAT!
 
For argument’s sake let’s say these costs sum up to around R263.33 (or 2.63% of R10,000). 
 
Paul on the other hand has only R2000 to invest. So he calls up his broker and uses the whole R2000 to buy shares in Standard Bank. 
 
But when he gets his transaction summary, he sees his total transaction trading costs were R146.98—which amounts to 7.3% of the R2000 he invested. 
 
So by trading shares with a small amount, you’ll end up paying more in trading costs. So that’s why you want to take into account your trade volume when you invest in any one share. 
 

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