When buying or selling stock, the investment firm or the advisor usually charges a fee that is known as commission. The charges on the stock can have an important effect on the returns. The issue is that these charges eat up the investment. This means that the commission has a negative impact on the return of the stock investment (Hackethal & Haliassos et al., 2012). This can be proven: even if the earning of the investment is as high as 7%, there would be a large amount of money that the investor pays to the company merely because you are getting the privilege of investing in their stocks.
There are two kinds of fee including the initial fee and the annual fee. The effects of these fees are dramatic on the returns as most of the returns are deducted in charges. Further, the return is also reduced due to the tax that is paid on the made money (Hackethal & Haliassos et al., 2012). When we make an investment of $1000 in stocks and earn $60 when sell the stock. This means that there is a 6% return on investment. If we pay $10 commission on this investment, and hence, keep only $50 with us, the returns eventually drop to 5% from 6%. So, the commissions have a very significant impact on the stock investments.
There are three ways to reduce these commissions and fees: first method is to limit the frequency of trading as high frequency of buying and selling of stocks means paying a lot more in commissions. Secondly, when making a trade, you can ask your advisor for a better deal on commission that consists of a lower rate. Third way to reduce the commission is to do your own research rather than seeking an investment advice; your experience may help in stock investment and you would also save the commissions (Barniv & HOPE et al., 2010).
References
Barniv, R., HOPE, O., Myring, M. & Thomas, W. B. (2010). International evidence on analyst stock recommendations, valuations, and returns*. Contemporary Accounting Research, 27 (4), pp. 1131--1167.
Hackethal, A., Haliassos, M. & Jappelli, T. (2012). Financial advisors: a case of babysitters?. Journal Of Banking & Finance, 36 (2), pp. 509--524.
