Building a Trading Budget - A Primer

So you would like to start playing the markets as an investor or trader? What are the costs involved in being an individual investor or trader? What things do you need to account for in your budget?

Firstly, there is the actual budget allocated to investing. You may design a weekly budget, or a bi-monthly budget or otherwise. The time frame of your budget mainly depends on how frequently you invest, and the type of trading such as intraday, daily, weekly etc. These factors will help you design an appropriate amount, plan where the money is going to come from, and where the returns will go to etc. The source might be bank accounts, specific investing accounts etc. Make sure you can access the funds you need in the context of your type of trading. For example, intraday traders might make frequent trades, and need a more liquid account. Some banks offer specific services for traders.

Secondly, include the costs of commission and slippage in your budget. When you place a trade, say a buy, at a certain quoted price, the actual price at which your order is satisfied is different from the quotation by an amount called slippage. It represents the cost of entering and exiting a trade. In earlier days, it represented a source of livelihood for floor traders. Today, with electronic trading, it is usually a smaller amount. Slippage is often increased when there are large changes in the market. Also be careful of crooked malpractices which increase slippage.

Commissions reflect the cost of brokering. Brokers place trades and manage your trading account on your behalf. For most traders, they are a necessary middleman, even in these days of electronic trading. Commissions often also include any taxes levied by the government. Typically, they are quoted as less than 1% of the transaction. However, be wary of the fine print in commission quotations. These fees reflect the livelihood of brokerages, exchanges and regulators etc.

Thirdly, keep in mind the cost of data services, advisory services, books, seminars, software etc. As an investor you need to do research when you are deciding on scripts. Simple places to start are an appropriate financial newspaper reporting stock prices, or a television or internet based channel for the same information. A standard financial magazine would also help you develop an understanding of the industry and investment analysis. A trading systems software is used by many to develop and testing trading strategies. Often, such research needs quality, cleaned data which is provided by commercial data providers at a price. Books and seminars are a less frequent but significant cost in your trading budget, and are important to keep learning about the field, meeting others like you, and keeping yourself up to- date. Web based seminars, meetings and conferences are often advertised in local trade publications and newspapers.