Pitfalls

Get to the chopper!
Leverage

Ensure that you are not borrowing (operating on margin) when buying stocks as this will incur interest costs greatly reducing your profitability. Options trading will require a margin account because of how brokers deal with premiums when selling and holding security in case of losses. You should only trade within the limits of the funds actually deposited rather than the additional margin allowed by the brokerage, for the same reason.


Currency and Foreign Exchange

Buying stocks in a currency that differs from the one you deposited into your trading account, involves a conversion to the desired currency at a variable exchange rate and/or borrowing of that currency, in order to complete the purchase. Brokerage costs are also charged in the currency of the exchange, which therefore, also vary with your exchange rate. Interest paid by the broker on unallocated funds should also avoid these unnecessary conversions. It is best to have all trading funds kept with your broker remain in the currency used by the exchange.


Commissions

There are a number of costs to you that a brokerage will charge even if they are offering "free" trading. These vary from a fixed charge per transaction, commission based on a percentage, or a less than fair exchange rate. Please be aware of the costs your brokerage will be charging you before purchasing any shares, because once they are purchased you will be stuck with them on that brokerage.


Taxes on Profits (capital gains liability)

Profit is the difference between the actual sale price, less any sale costs described below, and the average purchase price, which also includes the costs below, for that security.

Even if some shares are sold, the average purchase price is based on the sum of all of previously purchased shares and their costs, divided by that number, and then multiplied by the number of shares currently held. After shares are sold, the oldest ones are removed from the average and in that volume, on a first in first out process (FIFO).

Total price for a share "purchase" - converted to your local currency

  • price paid for the security at that time
  • plus broker commission charged as a percentage of price (where applicable)
  • plus broker fixed charge per transaction (where applicable)
  • plus foreign exchange commission (where applicable)

Total price for a share "sale" - converted to your local currency

  • price received from the sale of a security at that time
  • less broker commission charged as a percentage of price (where applicable)
  • less broker fixed charge per transaction (where applicable)
  • less foreign exchange commission (where applicable)