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“Francois, why on earth are my investment costs so high?”

by , 23 February 2016
“Francois, why on earth are my investment costs so high?”
“Francois: I read your article on using ‘buy limit orders' to buy shares at lower prices and decided to do it. But something seems to have gone horribly wrong. I tried buying R5,000 worth of shares with a limit price of 51c. But when I checked my account it only traded about R500 worth. My cost per share, after brokerage, is now 67c per share. What's going on???” - BM

The right tools, used in the wrong way, will lead to bad results…

Whenever you buy shares my first recommendation to you is that you place a limit buy order instead of a market order. Using a limit order means that the trade you want to do won’t happen if the share price you are looking for isn’t matched. This way you’ll always know what price you are paying for the shares you buy. If you use a market order on the other hand, the price you pay will be whatever the sellers of the share want at that moment – And this price can move very quickly.
So doing this means you often end up paying a higher than wanted price for the shares you buy.
But if BM followed my recommendation, why is it then that his trade still didn’t work out?
If he was using a limit order like I said; then surelyBMs cost per share should have been 51c, maybe 52c not nearly 67c right?
You see, BM made a single mistake that turned this effective investing tool into something that cost him in the end…

There’s more to placing a trade than just entering the numbers on the screen

BM entered his trade details on his online platform and left it at that. The following day when he got back he saw the trade went through – But not like he wanted…
You see, BMs mistake was not to monitor his trade.
Once you place a trade on the market, you need to keep an eye on it otherwise it can go wrong.
You see, with a limit order, most online platforms will execute a trade as soon as there are shares for sale at the price you entered. But the thing is, as in BMs case, there aren’t always as many shares available at that price as you’re looking to buy.
So, if you just placed your trade and never checked up again it could easily happen that you end up buying some of the shares you want, but not all of them. The problem with this is you pay a full brokerage charge on a few shares, so the effective cost goes up.
Luckily there are two solutions you can follow to avoid running into this problem…

Solution #1 – My three step plan to saving money on your trading account

Step 1 – Place your trade using a limit order
Ok, so you’ve decided to buy a share. So you go online to place your trade. You select “limit order” instead of “market order” as you should. Now you enter the price you would like to buy the shares at.
And, just as you confirm this order most online platforms will give you an option “Sms me when this trade matches”. If your online platform doesn’t offer you this, you should reconsider who your broker is.
Step 2 – Monitor your trade
Now, if at any time the trade is matched, you’ll get an SMS saying the trade was matched and the number of shares that have been bought.
If the shares bought are the same quantity as you wanted to buy, you’re fine. But if you ended up with less shares than you ordered; you need to proceed tothe next step.
Step 3 – A simple change that’ll save you on brokerage costs
Ok, so let’s say you wanted to buy 10,000 shares at 99c each. Your trade was matched but you only got 1,000 shares at 99c. You’ve paid the full brokerage cost though and this means the actual cost you paid per share is closer to 112c, nearly 14% higher than what you were planning on…
But lucky for you there’s a solution. With some brokers, you can buy shares in a company multiple times per day without incurring further ‘minimum’ costs on your brokerage.
That means, if there are sellers for your share at 100c you can merely adjust your trade up to 100c and buy the remaining 9,000 shares at that price without further problems.
Doing things this way would mean your average cost per share is now 101c. That’s a full 10% better than it would have been had you not done this.
But this is not the easiest solution and it can get costly if you chase the share price too high, which is why I recommend you follow Solution #2...

Solution #2 – The lazy solution to save money on brokerage

If you’re very busy at work during the day; or simply unable to go online to trade, this solution is for you.
Say you only trade online through a discount broker like Standard Bank Online or PSG; that’s great and it might save you a bit of money compared to a full service broker like Imara SP Reid or Vunani Private Clients.
But the fact is, I don’t recommend these brokers just because I like to. And I also don’t do it because there’s something in it for me.
I do it because I know they can save you time and money.
You see, you can phone up a broker at these ‘full service’ brokerages. You can tell your broker that you want to buy X shares in a company at a specific price of Y. You can even tell them that if they can’t get price Y during the day you are willing to go up one, two or
three cents.
It’s then their job to monitor the trade for you. They’ll make sure you get your shares, or don’t overpay for brokerage.
They’ll do this because they know every time they save you R100 or R200 on brokerage is another time you’ll be able to trade later on. Make more money buying shares and stay a client with them for longer…
So, whichever one of these two solutions appeals to you, make sure you apply it to your investing today so you don’t get the same mishap BM did this month!

“Francois, why on earth are my investment costs so high?”
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