Here at the Motley Fool, we continuously talk about which stocks we think offer good prospective returns to investors. But there is a lot more to investing than just stock picking. In fact, if you are not careful, you run the risk of giving away significant portions of your hard-earned cash to fees and taxes. Making money in the stock market is difficult enough, so why shoot yourself in the foot by incurring additional charges? Here are two things you should do to minimise your investing costs.
Keep your fees low
Although the advent of the internet has meant that share trading fees have fallen precipitously over the last few decades, they are still non-negligible. There are a number of ways in which you can reduce the amount you pay out to brokerages in the form of commissions. Buying and holding for longer periods of time is the next obvious solution to the problem of fees. Moreover, it not only decreases fees (fewer trades = fewer fees), it has been shown to be more effective at compounding wealth that trading in and out of shares and trying to time market reversals.
You may be a person who prefers to invest small amounts of your income in stocks every month. That’s fine too. In this case, you may want to consider applying for a regular investment service account. These allow you to pay-in small amounts every month (or quarter, year, etc) and invest that money in small increments. Importantly, regular investment services offer investors lower fees than they would incur by frequently investing through a standard platform, with some even offering 0% commission on trades. Do bear in mind that for extremely small amounts, regular investing can be inefficient. It all depends on your specific circumstances.
Get a shares ISA
An individual savings account (ISA) gives investors the ability to compound their wealth in a tax-efficient way. Any income generated by investments in a Stocks and Shares ISA is tax-free. This includes any dividends from income stocks, capital gains from the sale of investments and interest from securities like bonds.
A good starting point for such an ISA is to invest in an index fund that tracks the FTSE, as well as in funds that track other major indices, like the US S&P. This is the simplest, lowest-cost way to gain exposure to the compounding machine that is the stock market. However, this does not mean that you should buy at any cost. Just like any individual stock, a market index has a price-to-earnings ratio that is a reflection of how expensive it is relative to the ability of the underlying companies to generate returns to investors. Accordingly, you should aim to invest when the index is attractively-priced. Compounding is indeed a powerful force, but it only works if you do not lose money on your principal investment.