Div Tip #14: Mind the small transaction costs.

Dividend Tip Jar

My broker taxes me $4.95 for each stock purchase.  That isn’t bad.  For most people, small trade costs aren’t a big consideration.  Unfortunately trade costs can quickly eat into your return.  For instance:

Trade costs may increase resulting in a larger percentage of each purchase being taxed away.  For example a $5 trade cost is 5% of a $100 transaction, but a $10 trade represents 10% of the $100 principle that won’t be working for you.  Ever.

Transaction size decreases in which case any trade cost represents a larger percentage of the principle.  For example a $5 cost is 5% of a $100 trade, but only 1% of a $500 trade which means a larger percentage of your money goes to work.  Forever.

Purchase frequency increases.  If you’re trading once a month at $10 per trade your tax is $120 over the course of a year.  However, if you hold fire, pulling the trigger only quarterly, you’ll lose only $40. 

Of course, if you trade often, in small quantities, through an expensive broker, your losses are compounded.  That’s not the compounding you want.  The longer the investing horizon, the greater the damage if you’re not careful.  Remember, he who makes the fewest mistakes (trading costs) wins.