The share price is not everything

When we start to take an interest in investing, we most often think about how much we can earn, how to choose a company, and where to begin. In the background, however, there is one more matter that is discussed less often, although it carries great significance from the very first purchase. It concerns the costs of investing. For a beginner Elegant Investor the word costs alone may sound rather general. In practice, it means all the fees and deductions that can appear when you open a brokerage account, buy shares, invest abroad or choose a fund or an ETF.

An ETF is a fund listed on the stock exchange that can be bought much like a share. Its task is usually to track the behavior of a chosen index, market or group of companies.

This is an important topic because many beginners focus mainly on the share price. They see that one costs 100 euros, another 40 euros, and another 200 dollars. Yet the price of a financial instrument alone, meaning the investment product available on the stock market, does not yet show the full cost of the whole operation. You may pay a commission on the purchase, a currency conversion fee, and sometimes other fees that are not obvious at first glance. Well-understood costs help you better judge how much you really spend and what impact the fees have on your capital. This is especially important in long-term investing, where what counts is not only the choice of assets, but also a sensible approach to money at every stage. This is exactly why it is worth taking the time to understand the topic of costs calmly and thoroughly before your first transaction.

The brokerage commission

The most commonly encountered cost is the brokerage commission. It is a fee charged by the brokerage or the broker for executing a buy or sell order for a financial instrument.

A broker is an institution that gives you access to the market and lets you place orders on an investment account.

In practice, it looks like this. You want to buy shares for a fixed amount, and the broker charges a small fee for the transaction. It is usually expressed as a percentage, for example, 0.29% of the transaction value. Often, however, there is also a minimum commission amount. And it is precisely this element that matters greatly to a beginner.

Imagine that you want to buy shares for 300 in your account currency. If the broker charges a 0.29% commission, the commission alone would come to under one unit of that currency. But when the fee table states that the minimum commission is 5, you will in fact pay 5. This means that with small purchases the cost can be clearly higher than it first seems. For this reason, it is worth looking not only at the percentage itself but also at the minimum amount charged per transaction. 

For a person who invests small sums, this matters a great deal. If someone buys frequently and in small amounts, commissions can eat up a sizeable portion of the funds meant for investing. The point is not to fear commissions, but to understand how they work.

The currency conversion fee

Many women begin to take an interest not only in the stock market in their own country, but also in the US or European market. This is completely understandable, because many well-known companies are listed precisely abroad. In such a case, a currency conversion cost can appear.

Currency conversion means exchanging one currency for another. If you hold funds in one currency but want to buy shares listed in another, the broker has to convert your money from one currency to the other. This operation can cost something. Sometimes it is a clearly stated fee, and sometimes the cost is hidden in the exchange rate.

The example is simple. You have 1,000 in your account and want to buy US shares. The broker converts your funds into dollars, but does so at a rate less favorable than the one you see in an online exchange office or a financial service. The difference between a favorable rate and the rate the broker applies is a real cost to you.

It is precisely here that the concept of a currency spread appears.

A spread is the difference between the buying price and the selling price. In the case of currency it means the difference between the rate at which the broker converts funds to your disadvantage on one side of the operation and the rate on the other side.

For a beginner Elegant Investor the most important thing is that currency conversion can cost something even when you do not see a separate item called a currency exchange fee.

Fees for the brokerage account and extra services

Not every brokerage account works the same way. Many institutions advertise an investment account as free, but it is worth checking exactly what this means. Sometimes the lack of a fee concerns only keeping the account, not the transactions. Sometimes the account is free on condition of a certain level of activity. It also happens that the basic account costs nothing, but additional services do.

Such services may include paid real-time market quotes, access to foreign exchanges, transfers in foreign currencies, the holding of certain securities, or special analytical reports.

Securities are a general name for various instruments available on the market, for example shares or bonds.

For a beginner Elegant Investor one thing is the most important. Before opening an account, it is good to read the table of fees and commissions. This is the document in which the broker describes what it charges for and how much it charges. It is there that you will find information that is often not visible in advertising. The table may seem long, but it is worth devoting a moment to it. It is one of those documents that really helps to avoid disappointment. Not every fee means that the account is bad. Sometimes a paid solution offers a more convenient platform, better service, or access to a wider range of options. The most important thing, however, is to know what you are paying for and whether you really need it.

Costs hidden in funds and ETFs

Not all costs are taken directly from the account when you click buy or sell. For investment funds and ETFs, some fees are already built into the product's structure. This means that the Elegant Investor does not receive a separate invoice, but the cost affects the investment's results in the background. A fund charges a management fee, that is, for someone administering it, maintaining its structure and looking after how it works. In an ETF, this cost is usually lower than in traditional investment funds, but it still exists. It is expressed annually as a percentage of the fund's asset value.

If two products give similar access to the same market, but one costs 0.15% a year and the other 1.5%, then over the long term the difference can be noticeable. The higher the cost, the larger the share of the result that accrues to the financial institution rather than to your account. This does not mean that the cheapest product will always be the best. It is rather about the cost being understandable and justified. If you are investing for the first time, it is good to check whether the chosen fund or ETF provides a description of costs and whether you understand exactly what you are paying.

The spread when buying and selling an instrument

Apart from the commission and currency conversion, there is one more cost that is easy to overlook. It is the transaction spread. It sounds technical, but how it works can be explained very simply.

On the market, there is always a price at which someone wants to sell an instrument, and a price at which someone wants to buy it. These two prices are not always identical. The difference between them is precisely the spread. For an Elegant Investor, this means that when she buys, she pays a little more, and if she sold at the same moment, she would get a little less. On popular shares or large ETFs this cost tends to be small. On less-known instruments it can be clearly larger. For a long-term investor, the spread will not always be the most important cost item, but it is good to know it exists. Thanks to this, it is easier to understand why the result of an investment does not always appear neutral immediately after purchase.

Tax also affects the final result

When we talk about the costs of investing, it is also worth mentioning tax. It is not a fee charged for placing an order itself, but from the perspective of your portfolio, it has real meaning. If you make a profit from selling shares or receive a dividend, tax obligations may appear.

A dividend is the part of a company's profit paid out to shareholders. Not every company pays one, but many people interested in long-term investing pay attention to exactly this.

If a dividend reaches the account, part of the funds may be deducted as tax at the time of payment, depending on market conditions and the rules in force in a given country.

For a beginner, the most important thing is not to look at investment results solely through the lens of a rising share price. The final outcome is also influenced by costs and taxes. There is no need to understand every detail on the first day, but it is worth being aware that this aspect exists and affects the overall result.

A simple example of the whole cost of one investment

Let us assume you want to buy foreign shares worth the equivalent of 1000 in your currency. The broker charges a minimum commission of 20. On top of this comes the cost of currency conversion, which, in practice, amounts to about 10 at a less favorable exchange rate. The investment itself, therefore, costs not 1000 but about 1030. If you later sell these shares, another commission may apply, and possibly another cost related to currency exchange.

This is a very simple example, but it shows the general principle well. The price of the instrument is not the only amount to consider. An Elegant Investor sometimes pays not only for the purchase of the asset itself, but also for the whole path leading to that transaction. Such a view helps to plan decisions better and to judge the full cost of investing. At the start, this matters especially because you are only learning to compare brokerage accounts, investment products and the fees connected with them.

Where to look for information about fees

The best places to check costs are the broker's table of fees and commissions and the information documents for a particular product. If you are interested in an ETF or a fund, it is worth reviewing the document that outlines the annual fees and the product's basic features. If you are choosing a brokerage account, pay attention to the commission on buying and selling, the minimum commission amount, currency conversion, account fees and any additional costs.

It is also good to answer a few questions for yourself.

1. Do I intend to invest in my home market or abroad as well?
2. Do I want to buy shares of individual companies, or rather funds and ETFs?
3. Will I pay in larger amounts less often, or smaller amounts more often?

The answers help you judge which costs will really matter to you. At Elegant Investors, understanding the basics of long-term investing matters greatly. Costs are among the topics worth getting to know well at the start, because they affect how you judge an account, a product, and the whole process of investing.

What to remember

The costs of investing can appear at various stages and are not always immediately visible. Most often, they will be brokerage commissions, currency conversion costs, the spread, fees connected with the account and fees built into the construction of funds and ETFs. On top of this comes the influence of taxes on the final result of the investment.

For a beginner Elegant Investor, the most important thing is not to look solely at the price of a share or a fund, but also at all the amounts that accompany the purchase and the later holding of the investment. The better you understand these rules, the easier it is to judge how much investing really costs and what to check before choosing a brokerage account and an investment product.