InvestorQ : I am still not clear why trading costs matter to a trader so much. Can anyone explain?
diksha shah made post

I am still not clear why trading costs matter to a trader so much. Can anyone explain?

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3 years ago
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The point is that don’t look at trading costs as a percentage of the value of the transaction. Look at it as a percentage of profits or as a percentage of the spread in the market. Then things become a lot clearer. Trading costs are not just about brokerage but a host of other statutory charges. We are not even counting the latent costs like liquidity. There are 3 reasons why the trading costs matter to a trader. Firstly, when you are a trader your trade is all about a risk-return trade-off. You typically trade with a risk-return trade-off of 2:1 or at best 3:1. Higher visible and invisible costs can make a huge difference. Secondly, the idea of trading is to churn your capital as aggressively as possible and therefore there will be costs on both sides. Over a period of time these costs can add up to quite a bit and negatively impact the economics of your trading. Lastly, the impact of trading costs is much bigger than you may care to imagine. Consider that you are trading in Reliance Industries which is priced at around Rs.950. A total trading cost of 0.5% means that your break even is Rs.5 and if the total trading cost is 1% then your breakeven is Rs.10. When you are trading for the very short term this makes a huge difference! That is why your focus as a trader must be on keeping your trading costs as low as possible.

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