It used to be harder for people born without silver spoons in their mouths to buy and sell stocks. For one thing, people often assumed (and it was sometimes the case) that you had to buy stocks in "round lots" of 100 shares. That can make buying an $80 stock an expensive affair, requiring $8,000.
Then there were the traditional big brokerages, such as Merrill Lynch
Look at my own relatively short trading career. Flipping through my folders of records, I see that I bought 100 shares of Funco back in 1994. At the time, the purveyor of new and used video games cost $17 per share, so my total outlay was $1,700 -- plus the commission. My brokerage then was Fidelity Investments, and I see that I was charged $54 for the trade. Divide $54 by $1,700 and you'll get 0.032, which shows that I was spending 3.2% of my investment's value on the commission. That's not ideal.
Flash forward a bit, and in 1995, my brokerage was Aufhauser, which was later swallowed up by Ameritrade
A year later, in 1998, Ameritrade charged me $18 to buy a little bit of Berkshire Hathaway in September, and just $8 to buy some Starbucks
A brief tangent
Before I return to commission costs, permit me to point out some stupidities of mine, in the hope that you might avoid doing the same things. As I flipped through my thick stack of trade confirmation statements of yore, some lessons stood out:
- The stack was too thick. I was buying and selling much too frequently, holding some stocks for just a few weeks or months. If you're doing that, you're essentially making short-term bets on where a stock is headed, and few people can consistently make good short-term calls. I think part of my problem was my attention span. My funds were limited, so every time I ran across a stock I wanted to buy, I had to sell something else to afford it.
- I realize now how little I really knew about most of these companies, especially the ones I bought in my first investing years. Did Avid have some competition that might eat its lunch? Don't ask me. What did Western Digital really do, to make its money? Well, I could recite something from a stock report on it, but not much more. I certainly couldn't explain its business model. Not having a good handle on your holdings is a great precursor to getting blindsided when they begin falling apart.
- Some companies that I bought into, such as Starbucks, I shouldn't have sold. Again, I probably sold to buy something else, but I suspect that whatever I bought didn't do as well as Starbucks has done since then. (Fortunately, I have held on to my shares of some great companies -- such as Berkshire Hathaway.)
Back to commissions
So as I was explaining, commission costs have fallen dramatically lately. Ameritrade now charges me $11 per trade that I place online. Click over to our Broker Center's comparison chart, though, and you'll see a bunch of brokerages that charge even less than that. Some brokerages are charging just $4 or $5 per trade! (I'm not planning to switch brokerages anytime soon, though, because I trade so infrequently that the commission cost isn't a paramount concern.)
Schwab has recently lowered its rates from $20 to $13 per trade, while Fidelity has cut its own from $30 to $20 (and lower for more active investors). I noticed that the Scottrade website sports a comparison table showing that Fidelity would charge $155 for a limit order buying 10,000 shares and Toronto Dominion's
According to a Dallas Morning News article by Will Deener, there are more than 100 online brokerages right now. But the number is shrinking. Major player Ameritrade is buying another major player, TD Waterhouse, for several billion dollars. Many smaller brokerages were gobbled up by larger ones in the past decade. Now the larger ones are eying each other. According to Deener, "Today, more than 80 percent of the trading volume is confined to six of the largest firms."
Why are these brokerages merging? Well, it can reduce expenses. Two different brokerages, for example, need to maintain two different teams of techies to keep their computer systems running. One merged brokerage suddenly needs only one such team. Reducing costs is important these days, because people are not trading as vigorously as they did a few years ago. As Deener noted, "The average trading volume at Ameritrade . peaked at 270,000 trades per day in early 2000 but fell to 116,000 trades in early 2003. The volume has recovered in the past year to about 170,000 trades per day."
As the brokerages compete with each other, they're becoming more like each other -- discounters are beefing up the stock research they offer customers, while traditional full-service brokerages are cutting their commissions at least a bit. Brokerages are also looking to expand the scope of their operations. TD Waterhouse and E*Trade
So what should you do? Well, enjoy the cheap commission costs while they last. As brokerages merge, there will be less pressure to keep commissions down.
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Longtime Fool contributor Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of Berkshire Hathaway. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.