Investing is an excellent way to grow your money over time. If you’re able to invest in riskier trades, you can make your money grow much faster but this is not recommended for most people.
Whatever the case may be, whether you make your money slow or fast, one common rule applies you will have investment costs to bear. Below you’ll find a list of costs that are generally accrued depending on the type of investments you’re involved in.
Pay attention to them because these costs can eat into your gains if you’re unaware of how to minimize them.
This is a cost charged by mutual funds to investors. It’s the cost of managing the fund. The cost will be paid out of the returns on your fund, and it’s calculated annually. So you won’t have to pay out of pocket for it, but it does put a dent in your returns.
These fees are charged whenever you buy or sell stocks and funds. You must take these into account especially when selling.
If you sell your stocks just because there’s a small rise in price, the transaction fees will take a chunk of your profits and you might find that selling the stock barely makes you much… and you’re better off holding on to it.
Brokerages charge a fee for their services and your broker will take a commission too. Sometimes brokerages call this an annual fee or a custodian fee. Or maybe they call it account maintenance fees. Whatever it is, you’re paying for it. If you decide to close your account, there might be a closing fee for that too.
Front-end load and back-end load
Front-end load refers to the charges that mutual funds charge over and above their usual expense ratio. If you were to buy a share for $20 with a 5% front-end load, your share would only be worth $19 because $1 goes to the brokerage.
With a back-end load, you’re only charged a fee when you sell. You’ll pay a flat fee when you sell and it will be a percentage of the asset. Generally, the rate drops the longer you stay with the mutual fund.
Do note that loads are usually separate from commissions. So you must exercise due diligence and see how much you’ll be paying in costs before you invest.
Sometimes, fund managers may need to spend money to attract more investors to invest in the fund and so on. These marketing costs will be charged to all the investors involved with the fund. It’s seen as a way to increase the value of the fund and everyone shares the ‘burden’ of the marketing costs.
By now you’ll realize that there are many ‘hidden’ costs that come with investing. This is why it’s imperative that you do your research and know exactly what the costs are before investing.
Write down the fees/costs and keep it handy. Should you ever want to sell your stocks or make a redemption, you can calculate the net gain you’ll make after deducting fees. In this way, you’ll know if the trade is worth your time.
You should also check every now and then to see if the fees remain the same. Brokerages may change their fee structures and so on. You must be on guard.
Different types of investments come with different fees. Generally, if you’re an individual investor investing in stocks on your own, you’ll pay the lowest fees.
The moment other people are involved (E.g. brokers, financial advisors, fund managers, etc.) you can bet that the fees will skyrocket too… and they’ll make money whether you profit or not. So decide wisely before investing.
“Every time we make an investment decision at FedEx, we ask ourselves: What is the return on this investment?”Frederick W. Smith