Risk and Return
Investment Costs
Earlier we discussed brokerage account fee structures and the transaction costs you pay for buying and selling stocks. These transaction costs typically range from 1.5 to 2.5 percent for stocks with a full service broker. If you utlize discount brokers, you may pay as low as $10 for online transactions.
Let’s assume the brokerage you chose charges $7 per transaction and you have $1,000 you want to invest. Because you know you need to be diversified, you carefully chose 15 individual stocks. 15 stocks at $7 each will cost you $105. That means your $1000 investment is already down 10.5% to $895! Then of course you have to consider if you can even buy 15 stocks with your remaining $895.
Ok, so you have $895 to spread across15 stocks ($895/15=$59.67 average stock price). Which means you will need to pick stocks that average out to be about $59.67 each, and you would only be buying one share or two shares of each stock - this is not very efficient. So as you can see it can be expensive for a small investor to invest in individual stocks. Remember, when you want to sell these stocks or purchase new ones, you will face another $7 transaction fee for each sale
We will see that mutual funds also may have management fees or even commissions, however these are also for getting access to a portfolio.
Plus, if you are investing in a tax-deferred account such as an IRA or 401(k) you will not pay these transaction fees.
More specific mutual fund costs: Cost and Where to Buy »
