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.
Quote of the Day
October. This is one of the singularly most dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August and September.~Mark Twain
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