Reader: “I was reading your column today and got to this part:
This is a reason to buy and hold for the long run, rather than try to catch short-term swings. Not only do you save on taxes (and commissions and spreads), you largely eliminate this little-guy disadvantage. Someone may know something you don’t about Compaq’s upcoming news release, but its next 10 years will be based on bigger trends.
“Being a novice investor, I do understand the commission advantage but I do not know the tax advantage nor the spread advantages. Thanks, R.M.S., St. Louis, Mo.”
Andy: If you trade a lot, you pay a lot of taxes (if you have gains). And every time you trade, you pay not just the commission — which has become blessedly trivial thanks to firms like the one sponsoring this column, and others — but generally also face the spread between bid and asked; e.g., the stock is “twenty-one to an eighth,” which means you get 21 if you’re selling, 21-1/8 if you’re buying.
Thanks to the SEC these last few years, as well as to some good old-fashioned ingenuity and competition, even the spreads have narrowed significantly in many cases. But they’re still there. And on the less-frequently traded stocks in the backwaters of the market where I particularly enjoy troving for value (frequently reeling in an old shoe, but that’s another story), the spreads can still take a very big chunk out of your trading dollar.