Sunday, November 23, 2008

Stock fee is cheaper than mutual fund

Quite frequently I heard that many people do not buy mutual fund because its 5.5% fee is too high comparing to stock investment where each transaction is charged at 0.42%.

It is no doubt a valid concern. When buying stock, there is only one broker who is earning your commission. While there is a huge team working in your mutual fund, hence cost much more.

However, there is a catch to that concept.

There is a minimum fee charged to each stock buy-sell transaction. Lets say its $40. And you have just purchased a low price stock of a total of $400. You have just paid 10% commission fee for that investment, not 0.42% !!

In order to really enjoy the low fee, you will need to have a larger capital. For example, if the minimum fee is $40 and the normal fee is 0.42%, then each of your buy-sell transaction should be more than $9,524 or else you are paying more than 0.42% charges.

So no matter if you are buying
a 1 cent stock or
a $100 stock,
your minimum buying price
shoud be at least $10,000 !!

So unless you are already transacting stocks above 10K in each transaction, you should still go back to your mutual funds ....