IRA's- Trades too Costly

[Guest izfrankd]

I have a question I hope someone can help me with. I currently have an IRA with Scwhab. Every time I make a trade it cost me a lot. How do I or can I put this money into my own IRA so I can make trades without a third party getting a cut????

thanks for any help with this.

Frank

[John G]

You did not disclose the assets in your account, your trading frequency or the number of share you typically buy. What are you spending for commissions in a year? How many times in a year do you trade? What percent of your investment are your commissions? You also did not say your age, investment knowledge and how long until you retire. I can give you a much better answer if your tell me a little more about yourself. Brokerages charge commissions to cover there transaction costs, the brokerages that say they don't are playing games with the prices they show you for trades (which will cost you more) or have special programs for the whale accounts... multi million dollar accounts.

I am going to make some assumptions that will leave a useful message for others that might fall into the following common scenario: tax payer has less than $30,000 in IRA assets, trades perhaps 4-8 times a year, rarely more than 300 shares of any one stock, holds 6 stocks, commissions are costing between $150 and $350 per year.

If this is you, here is my answer. You probably should not be buying and selling individual stocks when your assets are below $30,000. Reasons: (1) you can't get a reasonable amount of diversification with 6 stocks, (2) commissions are a large percent of your assets, and (3) to make good investments (as opposed to guesses or following the herd) eats up a lot of time and it is not likely to be cost effective. Alternative: own one or perhaps two general mutual funds, one of which is a stock index fund with ultra low expenses and the other is a broad based growth fund. These would be NO LOAD funds. Frankly, some people with huge IRAs still use this simple system with good success. The index fund buys you general market performance, the growth fund gives you a small bias towards young/growing/future companies. You are not going to hear this kind of solution from many people in the investment community because they have a financial self interest in generating commissions. Same is true with asking a realtor about FSBO option. Trading is not for everybody - some panic an sell low, only to panic again and buy high. It takes time, it requires discipline and your MUST honestly track your results and keep records (not for the IRS) to learn from the mistakes you will make.

Other options to reduce trading cost: (1) use internet for Schwab trades to get the lowest possible rate, (2) switch to a low cost internet brokerage like Etrade, Brown, etc. with a commission schedule that most matches your trading pattern, (3) trade less often - buy bigger blocks, hold longer, etc. (4) consider DRIPS for div reinvestment, (5) have a core of no load mutual funds that you supplement with a few stock picks, (6) speak to Schwab and tell them what bugs you as you may qualify for some other program that would lower your commissions. All of these strategies have other issues like annual fees, investment risk, required effort, etc. You should know that trading in larger blocks like 2,000 to 5,000 at many brokerages is not any different then trading 400 shares. (not true with Schwab's commission structure which is linear over 1,000 shares for most customers)

Stock commissions are not the only issue in trading. You also have the bid/ask spread (especially on the NAZDAQ, and even more so with options) .

Please post again with some more details and I will take a second shot at answering your circumstances.

Disclosures: I have no business affiliations with any brokerages or mutual funds, just basic accounts like most people. I own a variety of mutual funds, trade stocks over 200 times a year, and have 20+ years of investing experience. What I do for myself is not appropriate for 98% of the public. I advise at no charge a number of people about investing strategies and teach investing basics (part of Junior Achievement) at the high school level for the last 15 years.

[mbozek]

While John's is good you should remember that you need to have a registered representative to trade stocks, bonds and other securities on a national exchange. You can avoid paying commissons on stock purchases by buying stocks through a DRIP- dividend reinvestment program where you buy a small number of shares directly from the corporation and then either reinvest the dividends or purchase more shares with direct purchases. Most DRIPs will accept IRA accounts. In fact dividends from drips can be counted as an IRA contribution as long as you have the requisite compensation for the year to make an IRA contribution. However, Drips are not free and there are charges for maintaining the account and for making trades. Some drips only sell/purchase stock on fixed days during a month. There may even be a web site for companies that offer DRIPs. But you still have to diversify your investment in drips the same as any other portfolio.

[John G]

Mbozek, thanks for expanding the info on Drips. I hardly mentioned them and gave no explaination.

I caution people to read the fine print on any ideas that supposedly reduce commissions. There is a whole slew of other "low cost" options, but usually you lose control over the timing of the purchase and the price you want to pay. The novices should also understand that NAZDAQ bid/asks are not just two numbers but reflect the numbers of a specific market maker. Some firms have internal bid/asks that are not the best price and will steer the "low cost" business in that direction so while you may be paying a micro-commission, you may be losing a lot on what brokerages call "execution". Yes, there is a wide range of commission structures, but ultra low commissions means a firm must find some other way to make up for the cost of maintaining the account. That can be inactivity fees, annual fees, charges for checks, long phone waits for customer service, etc. The brokerages saw severe revenue shrinkage the last three years when trading volume went down. The recent trend for brokerages is to boost any fee they can pass on to customers to supplement the lower revenues.

The big players that trade in multiple 1000x blocks get a natural economy of scale and therefore commissions are only a small fraction of the total investment. Ont the other end of the spectrum, if you are trading less than 100 shares at a time you get slaughtered over small lot execution.

The Schwab commission schedule favors: internet orders, trades between 500 and 1000 shares, and they have one of the industries best "execution" system as you can sometimes buy at the bid and sell at the asked because they apparently cross internally some orders. If you are trading beyond 1000 shares, other internet brokerages may be better as many have flat schedules for all trades 1000 to 5000 or higher.

Commissions is not the only factor to consider. Brokerages vary in terms of the quality of general service, access to information, access to real time quotes, options for mutual fund purchases, access to account info by internet (hard to believe, but true), margin interest rates (not applicable to IRAs), etc. When you choose a brokerage, you are choosing a "bundle" of features or capabilities. For example, you can talk to Schwab 24/7/365 while some brokerages are only around during NYSE trading hours.