Impact of fees on stock purchases

When picking a bank for your stock account one of the most important aspects that you should pay attention to is the amount of fees that you have to pay when purchasing or selling stock. Estonian banks have different payment schemes for fees but in the end the majority of clients such as myself end up making LHV the home of their portfolio.

The reason for this is simple – LHV doesn’t have a monthly fee for “management” of your stock account. In most Estonian banks the fee is something like 0,8-2€, in some it goes up to almost 4€. This means an additional 12-60 euros that you have to earn yearly just to be even with the fees! Especially with a small portfolio this is highly unlikely to happen.

Fee model for puchases

The purchasing fees for LHV are quite straightforward. The cost of a deal is 3€+0,2% of the deal price. The flat fee means that the bigger your purchase the less you pay per 1€ spent.

For the LHV formula the cost per 1€ ends up looking like this:


You can see a lovely downwards curve that starts getting closer and closer to 0,2 cents per 1€ while never quite reaching it. This is why it’s important to think about how much stock you purchase at once. If you were to make a purchase that’s 250€, then the fee per 1€ would be 3 times higher than if you were to purchase 1000€ worth of stock.

To avoid fees making too big of an impact on your returns it’s reasonable to aim your purchases close to 750-1000€ because at that point the impact of the fees starts curving lower and lower. Of course it would be ideal to make purchases in the range of 10000€ to minimize the importance of fees but as a small scale investor it’s going to take a while to get to that point.

This also illustrates quite well why as a small scale investor you won’t be making much money quickly buying/selling stocks hoping to make money off that – the fees will just eat out any potential profits very quickly. For a dividend portfolio luckily fees are likely to be a one time thing since you’re buying to hold – and hopefully to never really sell. Any rebalancing should happen by buying into other stocks, which you would do periodically anyways.

Barrier of entry to investing

Investing is without a doubt quite an awe inspiringly huge field and it’s understandable why a lot of people never really get into it. However, if you break the problems that stop people from investing into smaller pieces then the barrier of entry can hopefully be overcome more easily.

1. “I don’t have enough money to invest.”

This is of course perfectly understandable – people need to buy food, pay rent, pay for kindergarten fees etc. The first problem here is the fact that most people never really define how much money they need to invest. There are of course really demanding fields like real estate and bonds that need thousands of euros to start. There are also fields with a much lower minimum amount – social lending for one (you can start with 10€), investing into funds (I don’t particularly endorse this, but some banks let you start with 20-30€ per month), investing into stock (1000€ is already a reasonable amount of money to purchase your first stock). You could also start a company – technically you just need to pay the ~185€ for the registration fees!

The second problem is that people rarely look critically at how to find this extra money for investing. Of course, there are ways for extra income, side gigs, finding work from GoWorkABit, doing overtime or side projects etc. Another, and even easier way usually is to just save more money – being able to set aside an extra 5% per year, means anything from 300-1000€ per year depending on your salary! That’s enough for 30-100 loan pieces on Bondora or about 70 stocks of TVEAT dividend stock!

2. “It is all so complicated.” (aka the “I don’t know math” argument)

I’m surprised by how many people get really caught up in this argument. Really, not a single person who has ever started investing has never ever known everything there is to know about investing. An even bigger surprise – a lot of people who are into investing do not have economics degrees or a great understanding of mathematics. What they do have is a willingness to learn and a positive attitude.

If you find your lack of knowledge a serious problem that is truly stopping you then if you’re reading this, you have a great resource available – the internet. Even starting off Wikipedia on topics such as investing, interest, stocks, risk management, diversification etc will get you a great basic understanding. If you’re already looking for more details then open up Investopedia. If you’re more into learning from other people’s experiences then just open up the Bogleheads forum and read through the top posts! In the year 2014 lack of information isn’t a valid excuse in ANY situation.

3. “It’s too risky, I’ll just lose it all.”

This at least has some reason to it. You don’t want to get started carelessly and just lose all your money in a few bad deals. This, however shouldn’t paralyze you with fear and stop you from ever getting started with investing. This is why you read about risk management and diversification. This is why you do research and use logical thinking.

There isn’t a single thing in life that is risk free. People seem to think that them having a job is risk free – that they’re very unlikely to lose it. The recent crisis really showed how untrue that was. While your boss might leave you and your job might be made redundant, your investments won’t disappear on you in tough times as long as you take reasonable care of them.

Getting over the barrier of entry

1. Make a plan for how much money you’re planning to invest (what is your final goal?)

2. Look over your finances to see if you can generate extra income OR save more (set monthly goals)

3. Choose a few fields of interest and just READ about them (either books, blogs, forums are OK, just remain critical)

4. It’s fine to start slow and with smaller amounts of money to get a feel for it (just make sure fees don’t eat your money)

5. Find friends online or offline who share similar interests (even better, get a mentor!)

6. Be able to tell if the barrier really exists or if it’s only in your head!