The reason why 90% of the traders are losing money is because trading is a NEGATIVE, NEGATIVE sum game.
With $100 on the table that 90% of these traders lose money, how much will the 10% make? I asked a fellow trader this question, and we both felt that probably only half the amount or just $50. (Just our opinion) The other $50 disappear into the black hole of the system known as cost of trading.
All form of trading involve cost to facilitate the transaction whether you make or lose money. Rightly so because we need to pay for the services provided to ensure that the transaction is in order, safe and legal.
Traders even need to pay the government tax upfront in the form of 7% GST on the comm, no running away. For professional traders, they have to declare their profits which is subjected to taxes while they can't claim a penny if they lose money the following year except carrying the losses forward. Thus, the negative negative sum game.
Some gains are considered capital gain if taken in as an investment under their personal name. It's a grey area whether one derive this income solely from trading or trading as a part timer. Best to check with the acccountant if one is making lots of money.
Understanding the cost of trading is important for a trader who should treat trading as a business.
Let's look at the transaction cost of the various instruments.
1. Property - Basically for long term investors, 1% comm for the agent, stamp duty, valuation fee and lawyer's fee making it one of the most expensive in term of transaction cost. With capital gain tax and additional stamp duty thrown in for profits made within a year, only very savvy property specuvestors having good connections with developers and inside information should flip and trade.
One major upside on property investment is the depreciating value of our money and the limited supply of land in major cities. Thus, it is one of the easiest form of long term investment, it will always go up in the long run, no worries about mismanagement compared to listed companies.
The downside of property investment is liquidity especially when the market is down with transaction taking months to complete. Sellers might be squeezed to get out if there is an urgent need for cash.
2. Stocks - Cost of trading stocks have come down tremendously over the years but still the comm from trading Singapore stocks range from 0.4% to 0.25% for retail customers. It's still quite hefty but very liquid with narrow spreads and most traders treating profits as capital gain. Professional stock traders are registered with the Stock Exchanges paying yearly membership fees with comm below 0.1% but paying taxes on their profits.
3. ETFs, CFDs and Warrants - I'm not too sure about the comm structure but I'm sure it won't be cheaper than stocks with plenty of hidden costs factor into the prices by the banks that issue them and kiss your investment goodbye if these banks fail like Lehman Brothers.
4. Forex - "No comm, the best instrument to trade", claimed a very ignorant trader brain washed by some Forex course that he had taken. In actual fact, the spread between the bid and ask price is the comm for the brokers. It's very much cheaper now to trade Forex as the Euro/US$ pair spread sometimes narrow down to 1 pip which is US$10 for a round turn of buying and selling US$100k worth of currency. While some not so liquid currency pairs have spread of more than 3 pips which is US$30 per round turn transaction.
But, in time of volatility, the spread may widen to 3 or 5 pips making the transaction rather expensive. Moreover, Forex brokers are like bucket shop where they trade against the client's order. With the advance in computer software, its easy for the brokers to take advantage of client's order without them knowing it.
Forex Brokers are not well regulated, if they collapsed, say bye bye to your money. Most firm offering Forex courses are also introducing brokers for recommending their students to the Forex Broker, earning a comm for every transaction done. Rather good recurring income.
Futures - It's the cheapest in term of transaction cost and Interactive Brokers offer the most competitive rates for retail customers.
Options - About the same comm as Futures but some strike price may not be liquid with rather wide spread from the market makers. This instrument is meant more for the professional traders.
In my next post, I shall discuss more on the cost of trading Futures compared to the other instruments.