- Buy 100 shares of XYZ company at $20 per share. Let's use a discount broker where we may pay a $5 fee to buy the shares.
- Sell 100 shares of XYZ company 6 weeks later at $22 per share. Looks like a $2 per share profit on 100 shares, or $200 profit, right?
- Not only will you pay $10 to your brokerage account, you will also be responsible for short term capital gains, which are taxed at your standard income bracket. Let's assume you are single and you earn $50,000 a year at your job. That puts you in the 25% federal bracket. We'll also use a middle-of-the-road state tax rate of 8%.
- $200 profit, less $10 in transaction fees, leaves $190 in profit for the tax man to assess. Uncle Sam gets $47.50 and your state revenue department collects $15.20.
- Total profit of $200, less ($10+$47.50+15.20) = $127.30 in actual profit.
Historically stocks have outpaced inflation by 7% a year. Let's say inflation averages 2% per year for the next 25 years, so your average stock will yield a 9% annual return.
How much did you really lose?
Much more than $62.70. At 9%, in 25 years you would have turned that $62 into about $600! A single transaction resulted in $600 in lost opportunity.
It doesn't take a genius to see that several trades each year will literally reduce your net worth by hundreds of thousands of dollars in a lifetime.