Lessons › Markets of the world › The real cost of a trade

World 6 · Markets of the world · lesson 11 · level 3

The real cost of a trade

Every trade has a price tag, even when an app says zero commission.

In one line

Every trade has a price tag, even when an app says zero commission.

Explained simply

Imagine buying a toy and selling it back to the shop a minute later: the shop pays you a little less than you paid. That small gap is one cost of trading, called the spread, and there are others like fees and taxes. Even when a trade says zero commission, those costs are still there.

The lesson

Costs include brokerage or commission, the bid-ask spread, exchange and regulatory fees, and taxes charged on transactions, such as India's Securities Transaction Tax (STT). Leveraged positions held overnight can add financing costs, like forex swaps or crypto funding payments, and any order can suffer slippage. Small costs add up quickly for frequent traders and raise the win rate needed to break even. A good habit is to plan a reward several times larger than the round-trip cost.

A worked example

Illustrative example: a trader buys 100 shares at an ask of 100.05 while the bid is 99.95, so the spread is 0.10 (100.05 minus 99.95), and it costs 10 on the round trip (100 times 0.10). Commission of 5 each way adds 10 (5 times 2), so the round trip costs 20 (10 plus 10). Over 100 such trades that is 2,000 (100 times 20).

The same idea at four levels

1. Beginner. Every trade costs something, even with zero commission, because of the spread, fees and taxes.
2. Foundation. You buy at the ask and sell at the bid, so each round trip starts slightly behind by the spread.
3. Intermediate. Add up all the costs of a round trip: commission both ways, the spread, fees and taxes such as India's STT.
4. Advanced. Costs raise the breakeven win rate: a 2R plan whose costs take 0.2R off each win and add 0.2R to each loss needs 40% wins instead of about 33.3%.
5. Expert. Experts track costs in R, add overnight financing on leveraged trades, and skip setups whose planned reward is less than about three times the round-trip cost.

Mistakes to avoid

• Believing zero-commission trading is free; the spread and fees remain.
• Ignoring overnight financing on leveraged positions held for days.
• Planning a reward so small that costs eat most of it.

Goal of this lesson: List and add up the costs of a trade in different markets.