Market Pulse: A trip down memory lane
June 5, 2017
Some liken Wall Street to a casino where individual investors need a lot of luck to have any chance of success.
The opposite is the case. If it were true then Wall Street would be the only casino in which the odds are heavily stacked in favor of the players, assuming they are long-term investors. And it's not only the market's decidedly upward bias that favors investors. Investment costs have plummeted.
Here's a trip down Memory Lane:
Prior to the mid-1970s commissions were fixed. They depended on the number of shares and the stock's price. There was no point shopping around for another brokerage firm. All charged the same and listed commissions in the back of the Stock Guide.
Now there is a price war. Fidelity, Schwab, and others charge less than $6 per trade — any amount of stock, any price. Depending on a client's trading activity, the savings can be huge or at the least very significant.
Stock prices were expressed in fractions with the spread between bid and asked prices (at which you normally sell or buy, respectively) were no less than one-eighth or (for stocks over 30) one-quarter. So investors were 12.5 cents or 25 cents in the hole on a trade right off the bat.
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Now with decimalization bid-asked spreads are usually one penny. One cent. That is a savings of 11.5 cents to 24 cents or more per individual trade, 35.5 cents overall for a buy and sell. Trade 1,000 shares and that's a $355 difference. The savings are even larger for higher-priced stocks because the spreads are wider.
Years ago investors called their broker to place an order. The broker wrote a ticket and walked it to the back office where a clerk would transmit it to New York. If it was an order to trade a stock listed on the New York Stock Exchange, it would be sent to the floor where a clerk would give it to a broker, who walked out to the stock's post and executed it.
The process would take at least five minutes — sometimes much longer. The stock could rise or fall quite a bit while the order was in route. Now investors press "enter" or "send" on their computer, and a market order is sent and executed within one second. One second.
Bottom line: Costs have been slashed by 99 percent or more and the process speeded up, all to the benefit of investors, especially those who own quality stocks and hold them for the long term. The savings compared to years past are huge and they are at the expense of brokerage firms. A casino? Not like any I've been in.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.