How to Give Yourself a Raise

06/28/2011 9:00 am EST

Focus: STRATEGIES

Traders often think commission costs are beyond their control, but despite popular belief, a simple call to their broker may be all that’s standing in the way of a sizable cost savings each year.

Every business has overhead (some more than others), and although you may not have a brick-and-mortar storefront, you certainly have overhead as a trader.

We learn in Business 101 that to make more money, you either bring in more revenue or you fatten your profit margin by cutting costs. Plenty of posts on this site and others discuss ways to accomplish the former, but today, we’ll talk about the fastest way to achieve the latter; cost cutting.

The Elephant in the Room

Traders rarely stop to consider the biggest expense they face, which is usually commission costs.  The fees we pay to enter and exit trades are no doubt a cost of doing business, but once you’ve hit a certain experience level with your trading, it’s likely that your attention has diverted to strategy and execution (which is fine). 

By default, however, you’ve ignored one expense that can easily run into the mid-five figures over the course of the year if you’re an active trader.

Even if that’s not the case with you, it’s still worth taking note of just how much you’re paying in the form of commissions. New traders recognize this when they come to the market with small accounts, and they soon realize that they’ll need a sizable move in the stock just to overcome their costs.

Regardless of your situation, take heart, because there is a solution: Negotiate your commissions!

Aside from why you should do this, here are a few reasons why you can do this:

Advent of Technology

Transaction costs have come down tremendously in recent years for all traders.  Technology has greatly improved, which isn’t cheap, but the fact is that when it comes to the standard trading platform features, virtually everyone has similar technology. 

Occasionally you’ll find something very unique, but you can most likely accomplish your trading on a variety of platforms, which means you aren’t tied down to any single brokerage. They know this.

NEXT: Get Creative So You Can Get Your Way

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“Move the Line”

Every brokerage has the capability to lower your commissions. So get creative if you need to. Work the numbers and find out if there’s a threshold you need to meet in terms of monthly trading volume in order to get an improved rate. 

Find out if they’ll waive your platform fee (if you pay one) at a certain level, or switch from a per-trade to a per-share commission structure.

My broker (Cybertrader, now a part of Schwab) offers per-share pricing, and I’ve had my commissions structured that way for several years now. Their standard per-share rate is $.006/share, which means if you buy 1000 shares, it would cost only $6, which still blows away the $9.95 per trade that so many traders pay these days.

Very active daytraders can even negotiate lower rates based on their high volume levels.

Commissions are truly a cost of doing business in the stock market, particularly if you want access to a sophisticated trading platform, but you can still reduce your costs if you go about it the right way. Regardless of which broker you trade through, find out if they offer a per-share pricing structure. Making the switch should save you a little money in the short term and a lot of money over the course of the year.

You’ve Got Bargaining Power

The homepage commission price that brokerages show is a number most people will gladly pay, but it doesn’t have to be “the” number. Plus, the more active you are as a trader, the more you should view it as simply a starting point for negotiations. 

Every brokerage knows their margins, and they know the rock-bottom price that they can offer. I can guarantee you that’s not their advertised rate. They have room to move, and often all it takes is simply knowing that you can ask for something a little lower. 

While these are certainly not used car salesmen, the same principle applies: If they let you walk away, then they really can’t deliver the price you’re asking for.

Competition Abounds

Brokers are highly competitive and motivated to get your account, and they know there’s lots of turnover in the industry. That means they can lure you away from your current firm, but it also means that if they don’t retain your business, you’ll just go elsewhere. 

So if you’re looking for a new platform to trade on and you’re hunting brokers, ask for a reduced rate.  Odds are, if you find it offered elsewhere, you can get that rate matched. And even if you’ve been with your current brokerage for quite a while, there’s no harm in asking for a lower commission rate.  Remember, if they don’t keep you, someone else will earn your business, and they don’t want to lose you.

You don’t have to be a smooth talker to pull this off. Call up your broker and ask what they can offer you. Worst case, they tell you “No” and you’re exactly where you are now. 

In many cases, however, you’ll be able to cut down your transaction costs, which can lead to a big pile of money by the end of the year. How is that not worth asking for?

By Jeff White, trader and blogger, TheStockBandit.net

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