Trading currencies and commodities can yield very high revenues under the right circumstances, but there are a number of factors that can cut into these profits. There is no more valuable tool for a trader than knowledge, and if you know where these costs can come in you may be able to take steps to mitigate or even eliminate them and get that much more out of your transactions. Here are four forgotten costs in trading.
That brokers charge a commission isn’t really forgotten, but it is often underestimated how important it is to know what rate they are charged at and when. This gives you more information when choosing a broker and lets you make more realistic predictions about your own profit margins.
Commissions are even more important if you are an active trader. After all, more trades means that you are paying more commissions. That of course is to be expected, but it emphasizes the significance of selecting a trading platform that offers the lowest possible trading fees. A small reduction in commissions can dramatically improve your investment returns, so you owe it to yourself to research all of your options and to choose the lowest commissions possible.
Check with brokers whether there are fees associated with specific actions or states of your account — nothing can put a crimp in your day like an unexpected charge for moving money between accounts or failing to maintain a certain minimum balance. Even inactivity sometimes carries a charge. Keep an eye peeled for these tactics because these costs are designed to go unnoticed.
Be sure that you are familiar with ALL of the fees that a broker charges. Though you may be drawn by a low annual fee or low trading costs, those advantages can be offset by “incidental” charges, like fees for deposits and withdrawals.
This is a fee charged when a trader leaves a position open overnight. You can use a swap calculator like the one built into FxPro to see if it’s worth the cost of keeping options over between days of trading. Another thing to bear in mind though is that you’ll incur this cost three times on a Wednesday night to account for the weekend — a forgotten cost within a forgotten cost.
Another one that might seem obvious to experienced traders, but a lot of first-timers don’t realize how much these duties can cut into their earnings. Stamp duty in the U.K. has been scaled back but SDRT (Stamp Duty Reserve Tax) still applies to the transfer of uncertified shares and securities, which is to say the paperless transactions that make up the bulk of trading in the modern age.
Likewise the U.S. and Australia levy a capital gains tax on certain kinds of trading, so its important for any trader to look into their country’s tax system to ascertain whether any duties apply and if so, how they are affected by the scale of transactions and what effect they will have on the trader’s profits in the final shake of things.
Short-term capital gains tax can be a problem for active traders. While long-term capital gains (gains on securities held for more than one year before being sold) there are lower tax rates. But if you have short-term capital gains, those gains will be taxed at ordinary income tax rates. Those can be as high as 39.6% for federal income tax, plus 10% or more for state income tax in high tax states. That means that you could be looking at a marginal tax rate of 50% on your short-term trading activity.
Be absolutely certain you are aware of the tax implications of your trading activities. If you are particularly successful, you may need to set up estimated tax payments to the IRS to cover this expense.