You don't want to pay "too much" in commissions when you buy or sell stock. But how much is too much? Let's go through the math and see. (Don't be alarmed -- we're talking simple multiplication and division here.)
Think of a stock you're interested in buying. Let's say it's Entrail Foods (Ticker: ICKICK), famous for its popular Tripe Tarts. Now, let's answer a few questions.
1. What's Entrail's share price? $50.
2. How many shares do you want to buy? 20.
3. What's the value of that purchase? $50 x 20 shares = $1,000.
4. How much does your broker charge? Let's say $25 per trade.
5. What percentage of the investment is the commission? $25/$1,000 = 0.025, or 2.5%.
You'll be paying 2.5% in commissions. That's a little steep. It's best to avoid paying more than 2% in transaction fees on any stock investment. If you're paying much more than that, you're hurting yourself.
Let's take another example. Say that you want to buy $400 of Par Domes Inc. (ticker: UNDRPR), a chain of indoor golf courses -- and your broker charges a $30 commission. That comes out to 7.5% ($30/$400 = 0.075 or 7.5%). Ouch! If your original goal for your Par Domes investment was a 15% return, you'd now have to earn more than 22% after commissions to get there because you're starting out 7.5% in the hole! (Pardon the pun).
What's the solution? Well, you should either move to a broker that charges less per trade, or you should pack more money into the investment. Save up and invest $1,500 all in one shot into Par Domes, and a $30 commission will amount to just 2% of that investment.
If your funds are limited, check whether the company offers a direct stock-purchase plan, allowing you to bypass brokers entirely. Not all companies have them, but an increasing number do. With these plans, too, aim to pay no more than 2% in commissions.
Online at the Fool, we've got a newly renovated Broker Center, with guidance on how to choose a brokerage, as well as information on a bunch of brokerages. Check it out -- you may find a great place to open a new brokerage account or a new home to transfer an existing account to.
