Expenses That Come Along With Different Investments
What are the Common Expenses Associated
with Investment in Stocks, CDs, Bonds and Options?
Which financial product to invest in? Well, the answer to this question will depend upon several different factors. This is where using services of a financial planner will become very important since the planner would be able to analyze your financial position and help you choose investment options which are conducive to your financial situation. In this context, one of the factors you need to take into consideration will be the fees and expenses you will have to pay to invest in any particular financial product. As such, we will have a closer look into expenses you will have to bear for some of the common investment options.
Financial Products and Expenses
An Analysis of Costs for – Stocks / CDs and Bonds / Options
Commissions: Such commissions are charged when an investor purchases or sells stocks and are directly received by the broker.
Bid Ask Spreads: Bid ask spreads refers to the difference that exists between lowest amount sellers are ready to accept and highest price purchaser are ready to pay. As for instance, in case you are interested in buying shares of any particular stock and $15 per share is your bid. The moment your bid becomes highest one in marketplace, a seller would be accepting the bid you have placed and sale will complete. But as soon as your bid offer gets accepted, $14.95 becomes the current highest bid that is to be filled.
Not only bid ask spread a indirect expenditure, but also a good indicator of liquidity. In case of liquid stocks with a lot of sellers and buyers, the spread will usually stay narrow. On the other hand, if not much trading occurs for any particular stock then spread will tend to be wider for such stock. Thus, by taking help of a financial planner you will be able to clearly understand the bid ask spreads for any particular stock you are interested in investing and act accordingly based on information about liquidity of stocks you want to buy.
CDs and Bonds
- Price Spreads: Similar to stocks, it refers to difference between lowest price seller will accept and highest amount buyer agrees to pay.
- Commissions: In case of CDs and bonds, the amount of commission differs based upon market you are buying from, i.e., whether the secondary or the primary market. In addition to it, such commission can be levied on the basis of face value of such CDs or Bonds or on per transaction basis.
- Commissions: Options can have commissions on per contract basis as well as in the form of a flat fee. Moreover, additional charge will have to be paid in case investor decides to exercise his or her contract well ahead of its expiration.
- Bid Ask Spreads: In case you decide to trade options instead of allowing them to expire or exercising them then you will have to bear cost of bid ask spreads (ideally, you should consult your financial planner to know whether it will be appropriate to trade options or allow them to expire).
To summarize it can be said that commissions and fees can have significant effect on returns you are able to achieve out of your investments and as such you need to select investment options where you will have to bear least amount of costs.
Doreatha H. Salmons
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