This is directed at beginning investors or investors with a small amount of money. The experienced investors should already know this. Avoiding costs are an issue I harp on all the time. The more money you spend earning your money, the less you keep. This includes premium services, taxes, transaction costs, brokerage fees. Anything that keeps your dollars from compounding in the future. In general this concept is pretty easy to grasp but in particular small money and beginning investors need to know that there is a difference between paying $10/trade and $5/trade. Neither is very much if you are buying a Turkey for Thanksgiving, but we ain’t talking about Turkey are we.

What is the difference between a Schwab account at $12.95 per stock trade and $4.95 at TradeKing. Let’s leave aside the issues of service, information provided by the brokerage and speed of execution or hidden fees for IRA accounts etc. Let’s say you are a small time investor or an investor just starting to put money into tangible investments.  Let’s assume you have managed to save $1000 and you have been following  a few companies and are ready to invest your money.  You have company one that you would like to invest approx. $600 and company two $400. The first thing to remember is that unless you buy and hold forever, not a practice I recommend unless you are Warren Buffet, you will have a fee when you buy the stock and another when you sell it.  So for the Schwab account you will have $25.90 in total transactional fees and TradeKing $9.90. How does that translate for each of these two investments. At Schwab your transaction fees will amount to about 4.3% of your investment for company one and nearly 6.5% for company two. In both cases you should not invest. That means you have to make 4.3% and 6.5% respectively just to break even. How about the transaction costs at TradeKing? It amounts to 1.65% for Company One and 2.48% on company Two.  While you can make a case for investing in company one this way, you might want to hold off on investing in company two. Motley Fool has a rule of thumb that brokerage costs should not be more than 2% of the amount invested. For me I would prefer it closer to 1%. To get to that you would need to invest the whole $1000 in one company and that would be TradeKing.

I am not advocating that you put all your cash in one investment, nor am I suggesting that Schwab is not a good company. The point is to be aware of transaction costs when you are investing and make sure you are not hampering your ability to compound your money by taking too small a position in a company.

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