The Four Invisible 'Profit Piledrivers' That Could Cripple Your Trading Account
Trading costs can kill your portfolio.
There, I said it.
And I’m glad you’re listening!
What if I told you that you could slaughter your account taking only profitable trades?
That's why I like to refer to trading costs as 'profit piledrivers'.
If you don’t factor in the costs I’m about to reveal to you, you could never bank a losing trade and still kill your account.
I can’t begin to explain how many traders I’ve seen not take costs into account and end up actually taking a loss because of it.
Has this ever happened to you?
Not a great feeling is it?
Banking a winner only to find out that at the end of it all you lost money.
Well that’s why I want to uncover the costs you’ll pay as a trader so you can make sure you always come out on top.
The Four 'Profit Piledrivers' That're Bleeding Your Trading Account Dry
Profit Piledriver #1: Stockbroker Fees
This is probably the most obvious cost you’ll pay.
Your broker charges you a fee to put your trades on.
This can either be referred to as brokerage or the commission amount.
It varies between brokers, but as a rule of thumb you can expect to pay anywhere around R100 every time you open a trade AND every time you close a trade (you need to check this with your broker).
That means you could be paying as much as R200 or more for every opened and closed position.
Think about this for a second.
Let’s say you have an account of R50,000 and your position size is 5%, meaning you place a trade of R2,500.
If you pay a flat fee of R100 for opening the trade and another R100 for closing the trade (no matter what happens to it), that means you need your trade to grow by 8% just to be back at breakeven point!
For the sake of this example I’ve left other charges out to give you an idea of how much of an impact this charge alone can have.
So many traders don’t take this into account.
And it’s why they actually close losing trades even when they think it’s a winner…
Like I mentioned, what you pay depends on the broker.
Some charge R100 per leg, whilst others charge as much double that per leg.
Make sure you know what your broker is going to charge you per leg so you can factor it into your trades.
Don’t bank losers and not know that you’re doing so!
Profit Piledriver #2: Taxes
When you trade you deal with two types of taxes.
These are Securities Transfer Tax and VAT.
Securities Transfer Tax, otherwise known as Marketable Securities Tax, is unfortunately unavoidable.
This is a government tax, and is 0.25% of the stocks you purchase (the total price).
There is some good news though!
This tax is only levied on the first leg of your trade, so you're only liable to pay it when you purchase your stocks (so not when selling them).
The second tax you need to be aware of is VAT.
VAT is simply a 14% charge on your brokerage fee, STRATE and Investor Protection Levy.
I’ll come to STRATE and Investor Protection Levy in a second.
You’ll pay VAT on both legs of your trade, so you’ll pay it when you open a trade and when you close a trade.
I’ll explain more with an example further below.
Profit Piledriver #3: Insider Protection Levy (IPL)
This cost is so tiny it’s almost not worth mentioning.
The IPL is only 0.0002% of your purchase price or your selling price of your stocks.
You're liable to pay for the IPL whenever you buy and sell stocks, and it’s used to finance any insider trading investigations.
Most traders end up paying cents, if even due to the IPL.
But it’s good to know where every cent is going isn’t it?
Profit Piledriver #4: STRATE
Every time you buy or sell a stock the transaction is settled electronically.
This is done by a company called STRATE, and without this settlement taking place your transaction simply could not happen.
Obviously STRATE is a business, and for doing this settlement STRATE charge an electronic settlement fee on each transaction.
There are two different costs you could pay, and it all depends on how much the value of your transaction is.
If your transaction is less than or up to R200,000 you’ll pay R10,92 per leg.
If your transaction is between R200,000 and R1,000,000 you’ll be charged a fee of 0.005459% (this excludes VAT).
Any transactions over R1,000,000 are charged a flat fee of R54,59.
The Costs You Have To Pay When You Place A Trade
I know these can be confusing, so let’s run through an example to make it a little easier.
Let’s say you’ve had your eye on ABC Stock for a few days and according to your strategy it’s a solid buy.
You get in at R500, and you buy 50 stocks.
Things go your way and the stock rockets up to your target level of R550.
You close your trade, with a smile on your face.
But should that smile really be there?
Did you actually bank a profit?
time costs will tell.
Let’s break down all the costs you would’ve paid on the trade and if you would walk away with a profit.
50 stocks at R500 each would total R25,000.
If your broker charges you 0.65% and a minimum broker fee of R65 then your brokerage would total R227.50.
The STRATE fee would be R10.92 (as the transaction amount is under R200,000), the Investor Protection Levy would come to R0.05, and the Securities Transfer Tax would be R62.50.
Don’t forget the VAT!
That comes to R33.39.
This brings your total costs to R334.36.
That means you’d pay a total of R25,334.36 just to get into your trade!
Let’s take a look at your exit leg and what your costs would’ve been there.
You sold your 50 stocks at a price of R550 each, meaning the value of the shares sold would amount to R27,500.
Your brokerage fee would total R243.75, STRATE would come to R10.92, the Investor Protection Levy would be R0.06, and VAT would come in at R35.66.
The total costs for exiting your trade would cost R290.39.
This would mean your proceeds from the trade would be R27,209.61.
So, did you make a profit?
Well, taking all costs into account, you paid R25,334.36 to get into your trade and you got out R27,209.61 once you sold your stocks.
That leaves you with a R1,875.25 profit!
It might not be huge, but knowing where every cent is going helps you factor in costs and gauge whether a trade is potentially worth it or not.
How Not To Kill Your Trades Before They’ve Even Played Out
Costs are trade-killers.
But only if you don’t factor them in!
Which is why whenever you open and close a trade you need to take the four hidden costs I’ve just shown you into account.
Remember, the four costs you need to be aware of are:
- Stockbroker fees
- Taxes (Securities Transfer Tax and VAT)
- Insider Protection Levy (IPL)
- STRATE Settlement Costs
Understanding every aspect to your trades is crucial.
Position sizing, money management, win rate, strategies, and psychological barriers are hard enough to deal with, without you killing your trades by not taking the costs into account.
Keep these costs in mind whenever you place a trade and you’ll already give yourself an advantage over 95% of traders out there!
Do this and you’ll be banking profits in not time!
Until then, here’s to profitable trading.
The Money Lab