When I was in college, one of my best friends was the campus bookie. He always had wads of cash. For a kid in college, he made great money.

Today, a different friend of mine is in a similar line of work. He also makes great money.

In fact, he’s worth millions.

[ad#Google Adsense 336×280-IA]But for both guys, the key to moneymaking isn’t dependent upon being a great oddsmaker.

That’s hardly the case.

Instead, it’s the vigorish, or the “vig” as they call it in the betting world.

The vig is the difference between a losing bet and a winning bet. It’s the “juice,” the “cut” or the “take.”

A winning bet might pay $10, but a losing bet loses $11. As long as the bookies even out their risk, they are guaranteed to make money. If their customers evenly win $1,000 and lose $1,000 in bets, the bookies make $100, because the $1,000 in losing bets pays them $1,100.

Investors and traders pay their own versions of the vig in the form of commissions and the spread in the stock price. And these costs can add up, especially if you’re an active investor.

But as I’m about to show you, there are ways to reduce the fees or even eliminate them by selecting the right brokerage and learning how to interpret the spread.

Navigate Commissions

The average commission is $120 per trade using a full-service stockbroker. But there is absolutely no reason to pay that much for a trade. You should be able to negotiate that number down sharply.

And these days, many brokers charge an annual fee of about 1% of your assets for managing your money. If you’re paying the annual fee, you shouldn’t also be paying commissions.

Discount brokers like Fidelity and Schwab typically charge around $7 to $10 per trade. It’s not much, but if you’re an active trader, it can add up to a few hundred dollars or more over the course of a year.

And if you have only a little to invest – say, a few hundred dollars – even a $7 commission is a big chunk of your investment.

While the commission price is usually not negotiable, you often can negotiate “for free” trades. If you’re an active trader, you may have more leverage to request these types of trades. You simply tell your broker you would like some commission-free trades. If he’s unwilling to make a deal, move your money to another firm that offers them.

Many online brokerages offer a large number of commission-free trades to new account holders. And brokerages like Robinhood offer free trading and never charge a commission.

While you won’t pay each time you make a trade, it isn’t charity. In Robinhood’s case, it’s making its money on margin lending and interest on your cash. And you can trade only on your phone, not on a computer.

Stay Between the Spread

When you trade a stock, there are two prices quoted, the “bid” and the “ask.”

The bid is the lower figure. It’s the price at which you sell (someone else is bidding for stock). The ask, or the “offer,” is the price at which you buy (someone else is asking, or offering their stock at that price).

It looks like this:

An investor who wants to buy Apple (Nasdaq: AAPL) will pay $99.65 if he buys “at the market.” A trader selling Apple will receive $99.56 per share if he sells “at the market.”

You can see there’s a $0.09 difference. That’s called the spread. So if Apple’s price stayed the same all day, the market makers would make $0.09 per share every time they bought and sold shares.

But remember, this is a market. Not a department store that has fixed prices. Just because the market maker is asking for $99.65 a share doesn’t mean you have to pay that price.

You could bid $99.60 for Apple shares. When you do, you would see the spread tighten to reflect your new lower bid of $99.60. If a seller can’t get their $99.65 ask price, they might come down and meet your bid price.

This is known as buying or selling “between the spread.”

Some stocks trade with a very small spread of only a penny or two. In those cases, you probably won’t be able to trade between the spread. But when a stock or option has a wider spread, it’s definitely worth buying between the spread if you can.

After all, there’s no reason to pay retail prices for a stock if you can get it wholesale.

Keep in mind that your order may not get executed if you’re trading a fast-moving stock. But with a wide spread of $0.50 to even a few dollars, like you often see with options, you should always try to get filled between the bid and the ask. Otherwise, you are likely overpaying for the option.

The bottom line is that trading and investing can get expensive. But there are ways to save money on your trades if you’re willing to do a bit of legwork.

Figure out if you’re overpaying when it comes to annual fees and commissions, and switch to a more reasonable broker for some cost savings. And when you’re trading stocks and options, avoid overpaying by buying and selling between the spread when you can.

For more profitable investments, leave the vig to my buddies, not to your broker

Good investing,

Marc

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Source: Wealthy Retirement