Keep Investment Costs Low to Increase Earnings

Investment costs are an aspect of investing that many investors overlook. Even though they are often an afterthought, they can play a vital role in how successful you are as an investor. Here are a few things to consider about the importance of keeping your investment costs low so that you can increase your earnings.

Investment Costs

Every investment that you take on is going to have some type of investment costs associated with it. When you buy stock, you are going to have to pay commission to a broker. When you buy shares of a mutual fund, you are going to have to pay operating expenses and a sales commission. When you invest in bonds, you are going to have to pay a bond broker. Most investors consider these expenses necessary evils, and they do not give them another thought. However, if you want to be successful in investing, you need to pay special attention to how much these expenses are really costing you.

Impact

Investment costs can have a massive impact on your portfolio. For every dollar that you have to pay in costs, this is another dollar that is taken out of the percentage that you earn in your investment. For example, let's say that you are working with a stock broker that charges a $25 commission for every trade that you make. If you invest $1000, this is essentially like giving the broker 2.5 percent of your money up front. This means that you have to make another 2.5 percent on this individual trade in order to make up for the cost of the trade itself. When an investor considers this, she might stay in the trade too long in order to make up the difference. In some cases, that can cause her to lose the trade and lose even more money.

If you invest less money, the impact of the costs is going to be even greater. For example, if you had only $100 to invest, you would essentially be paying 25 percent of your investment to your broker. In this case, it probably would not make much sense to invest because it would be very difficult--and take a lot of good luck--to make up 25 percent.

Lowering Costs

In order to maximize your returns, you need to try everything that you can to lower your investment costs. There are a number of different strategies that you can use to lower the costs and put more money in your pocket. For example, if you are trading stocks, you may want to look for a discount broker. Discount brokers allow you to trade the market without paying the high commissions of a traditional broker.

You could also choose to invest in a no-load mutual fund. This will make it so that you do not have to pay a sales commission on the front end. When you are shopping for mutual funds, you will also want to choose one that has a low annual operating expense. 

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