How do you make money after paying trading fees on a small account?

Question

I have been using the Robinhood platform for my trades since there is no fee for a trade. I'd like to switch to something a little more feature rich but I just can't figure out how you all pay the trading fees without always being in the red (aside from investing huge chunks of money at a time). Note. While I plain to have long term ETFs and MFs in my portfolio for diversification I also want to take an active role in my investments, do my research, find stocks that have a catalyst and make some swing trades. This seems like a more profitable approach (albeit more risky of course) and more interesting from my perspective of being involved in the process and constantly learning new things.

For example if I were to invest $100 and get a 10% return on that investment which would make be very happy as I could reinvest that and grow it. However if I'm not misunderstanding Ameritrade would have charged me $7 to buy and another $7 to sell so my net profits after fees would be $(4) leaving me in the red after making a 10% return on my investment.

Even if I were to save longer and start by investing $500 instead of $100 I'd be in the green but still losing a staggering 20% of my profits to fees and would have had to take 5 times the risk for that. I'd also lose any ability to have diversity in my portfolio because I'd always have to use my entire portfolio for a single trade to have enough money to stand to make a large enough profit to offset the fees.

How are you making large enough profits to negate the cost of fees? Are you all rich and only do trades in excess of like a thousand dollars or something?

Answer 1

It's not feasible to day trade with an account worth $100 or $500. Apart from that, in the U.S. you have to deal with the Pattern Day Trader rule.

A PDT-er is someone who makes 4 or more day trades (ETFs, options and equities) in 5 business days in a margin account, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period.

A PDT-er must maintain a minimum equity of $25,000 on any day that trades are made. If the account falls below $25,000, you will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.

A benefit to a PDT is being able to trade four times the margin maintenance excess in the account as of the close of business of the previous day (2:1 allowed overnight). So you can be 4 times as wrong or 4 times as right :->)

Once you are "rich" and have that much in your account, two of the lowest fee trading platforms are tastyworks ($5 to open, no fee to close) and Interactive Brokers (50 cents per 100 shares with a $1 minimum ticket). If you trade larger blocks of shares, tastyworks makes more sense. If 500 shares or less, IBKR is more cost effective. If you're a scale in, scale out trader, IBKR is the better choice.

Answer 2

The other people commenting and answering are correct, for many ETFs or mutual funds, there are little to no fees. But that wasn't your original question.

if I were to invest $100 and get a 10% return... Ameritrade would have charged me $7 to buy and another $7 to sell so my net profits after fees would be $(4) leaving me in the red after making a 10% return on my investment.

It's a simple principle called "economies of scale." Here's an example: Say you have 10 shares that you bought at $7. If the stock goes up to $10, you make $30. Now, if you had bought 100 shares, you would make $300, and so on. The larger your initial investment, the more you make off of small changes in the stock price and the easier it is to offset trading fees.

This is why buying packaged mortgages (aka mortgage-backed securities) is profitable. It's hundreds or thousands of mortgages each paying a small amount, but together providing a decent return.

Hope this helps!

Answer 3

There are two ways to make the trading fees less significant (i.e. less painful):

1. Invest more money

2. Hold stocks longer before you sell them

Yes, if you are buy $100 worth of stock and sell it in a few days or weeks, even the best discount broker is going to eat you alive on fees.

But suppose you save up $1000 before you make your first buy. You sell it when the value has gone up 10%. So you make $100, and you pay maybe $20 in fees. That's 20% of your profit, which is painful but not fatal. So you made 8% on the deal instead of 10%.

I'm not particularly rich. I saved up $2000 before I opened a brokerage account and tried buying individual stocks. Most of my purchases are around $1000. I figure that's big enough that the fees won't eat up all my profit, but small enough that I can still afford to buy a fair number of different stocks and not have all my money in one or two companies. Plus I tend to sit on stocks for several years before I sell, so any gains get to add up and compound. (My trades are still modest because most of my money is in my IRA and 401k.) (I'm sure others will say I'm foolish to sit on a stock for years, but that's a different question.)

Frankly, if all you have to invest is $100, I think you should either buy mutual funds that don't have transaction fees, or save up more before you get into individual stocks. I think that, in general, $500 to $1000 is a realistic minimum stock purchase. I stock to mutual funds until I was ready to gamble $2000.

Answer 4

Both Schwab and Fidelity have a set of ETFs for which they charge no transaction fees. Other brokerages probably also have such funds.

EDIT: note that these funds usually have policies to discourage active trading, so they definitely are not for the person who wants to "take a more active role with swing trading ... and finding good penny stocks to swing trade."