What are the costs of investing?
Investing is never completely free! With any form of investment there are costs involved. Many investors underestimate the importance of investment costs. A higher cost percentage can significantly reduce the investment returns. But which costs are charged for investments and how can you keep these costs as low as possible?
Save on costs and compare first!
Before investing, it is wise to first compare the costs extensively. In a year’s time, a higher cost percentage of one percent can easily save you tens of thousands of euros in returns. It is therefore important to research the different costs your broker charges. This will prevent you from facing unpleasant surprises.
Do you want to know where you can invest the cheapest? Use the button below to compare directly at which broker you pay the lowest costs:
How can you reduce your investment costs?
Brokers can charge many different costs. Of course, you want to obtain high returns. This makes it attractive to minimize costs as much as possible. But how do you do this?
It is important to make a clear plan first. Only then can you determine at which broker you can invest most economically. Think about the following questions:
- How often do you want to invest?
- With what amount do you want to invest?
- In what type of investment product are you’re going to invest?
Once you have the answers on these questions, you can determine what the smartest way is to reduce the costs of your investments as much as possible.
When you make many investments, low commissions are extra important. When you only make some investments, it can be more important to have low management costs and no inactivity costs.
When investing a small amount, it’s vital to choose a broker with a low commission. Fixed costs of $2 per transaction are no problem on an investment of $10,000, but are problematic with an investment of $100.
At the same time, brokers with high service costs are unattractive if you invest a large amount. You’ll pay a fixed percentage on the assets you have invested.
It is also important to consider what you will invest in. For example, one broker may be cheap when investing in shares, while another broker may be advantageous for investments in investment funds.
Pay close attention when investing in foreign shares. Some brokers charge high transaction costs for investments in a different currency.
The costs can vary greatly per broker. Therefore, spend enough time on the selection process of a broker, so that you do not face annoying and unexpected costs!
Why are costs so important?
Many investors pay little attention to the costs of investing. This is a shame! Costs can strongly influence the long-term return. We explain this in the following example. In both examples $80,000 is invested at a return of 7% per year over a 25-year period.
- At 0.5% annual cost you’ll end up with $380,000.
- At 2% annual cost you’ll end up with $260,000
A minimal difference of 1.5% in costs can therefore cost you more than $100,000 in return! So be meticulous when selecting a broker or an investment product.
What are the costs of investing?
How much you want to invest depends on your situation. There are several cost items that a broker can calculate. Below we discuss the most common costs:
- Fixed transaction costs on, for example, a share
- The spread or the difference between the purchase price and the selling price
- Currency costs for converting to foreign currencies
- Service costs over the total invested capital
- Inactivity costs for not using your account
- Management costs for managed investments
- Performance fee for the results of the investment fund
- Costs for extra services like real-time quotes
- Costs for withdrawing money
With many brokers, you pay a commission on every investment. This commission often consists of a percentage of the total value of the investment. Most brokers also charge a minimum amount of costs.
When you invest in shares, eToro often is the most advantageous party. Read more about this broker.
Not all brokers charge direct transaction costs. For example, brokers where you trade in CFD’s don’t charge a direct commission. Read here how transaction costs are calculated for this type of investment.
With all brokers you also pay a so-called spread. The spread is the difference between the buy and sell price of, for example, a share. The spread is always relative. You pay a certain amount per share that you decide to buy.
The fixed costs or commissions are often clearly indicated. For example, you pay $2 on each transaction. Spreads, however, are more difficult to compare. The costs can differ per share. On one share you may only pay two cents at a broker, while on another share you pay $1. Do you want to know where you invest in a share against minimal costs? Then you will have to investigate what the spread for that stock is with different brokers.
It is often possible to receive a discount on your spread when you invest with large amounts. Are you planning to invest with large amounts? Then it is wise to contact your broker for a discount.
With foreign investments, you often pay costs for converting currencies. This happens when you invest in a foreign stock that is noted in another currency than your own. You for example change euros to dollars. The costs charged by brokers can add up considerably. Sometimes you pay even a few percent. This, of course, greatly reduces the return on international investments. It is therefore important to research first how much it costs to invest in foreign shares.
If you want to avoid currency costs in active trading, you can choose to trade in CFD’s. Furthermore, you always have an exchange rate risk when investing in another currency. The value of your share can increase. However, when the foreign currency also increases in value, you can still lose money. You will receive less of your currency back. Do you want to know how the exchange rate works? Then read this article.
Traditional banks in particular still charge a so-called custodial fee. These are annual costs that are charged for holding securities. Fortunately, these costs can easily be avoided. Open a separate investment account where no custodial fee is charged. In our overview of brokers you can find multiple brokers where you can invest without paying these safekeeping services.
With some brokers, you also have to pay money if you do not trade enough. Only when you make a minimum number of investments, you can avoid these costs. These expenses are especially annoying for the investor with a long-term vision. After all, buying and holding shares once will cost you money every year. Therefore, always investigate whether the broker charges inactivity costs.
Investment funds usually charge management costs. These are costs for maintaining the portfolio. Other ongoing costs such as the administration and marketing costs of the fund are also passed on in this. Always remember that a more expensive fund is not always better! An index fund often has lower costs and often achieves comparable or better returns than an active investment fund.
Some funds also charge a performance fee. When a fund is doing well, you have to give up part of the return. Incidentally, this only occurs with actively managed investment funds. No performance costs are charged for index funds and trackers.
Many brokers also charge for specific services. Consider, for example, costs for streaming live quotes or costs for the use of a software package. It is therefore always wise to read the fine print first. That way you prevent your investments from suddenly becoming much more expensive.
The final cost item for investments is transfer costs. Many brokers charge costs when you want to move your portfolio to another provider. Some brokers do offer to pay these costs for you. Moving to a different provider is often a hassle. It is therefore wise to prevent this as much as possible by directly choosing a good provider.
Some brokers also secretly charge for withdrawing money. This is also annoying because it directly reduces your return. Therefore, always check whether a broker charges costs for withdrawing money.
Reduce costs by investing for free?
With some parties, it is also possible to invest ‘for free’. Please note that a broker who offers free investing always has ulterior motives. This can be harmless. Some brokers offer free investing because they hope clients will purchase other more expensive investment products. Other brokers try to make money sneakily by, for example, passing on other costs.
Do you want to know more about investing without costs? In the article below you will immediately learn how investing works without costs:
Cheap versus expensive investment products
Because of a psychological bias, many people often have a wrong idea that expensive products are better. This is often not the case with investment products. For example, when you look at the returns of passive and active funds, you see that passive funds often perform better. Active mutual funds select stocks themselves with the aim of beating the market. Passive funds monitor the market by, for example, an index.
The costs of an active fund are higher. Yet, you see that there is usually no higher return. Even with an equal return, you achieve a much higher return with an index fund. In 99% of the cases it is therefore best to choose the cheapest investment product.
The same rule also applies when it comes up to choosing a broker. Cheap brokers often offer similar options as expensive brokers. There is therefore no point in investing with an expensive bank or broker. Unless you are looking for something very specific, it is almost any time better to go for the cheapest party.
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When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.