"Commission-free" is the most successful piece of marketing in modern retail finance. Trading is not free. The costs just moved somewhere you don't get a receipt for.
What does it actually cost to place a trade?
Four things: the bid-ask spread you cross on entry and exit, any commission or platform fee, slippage between your expected and actual fill, and taxes on realised gains. Only the commission shows on a statement. The rest are invisible, paid on every trade, and they compound with frequency.
The four costs, in order of how much they're underestimated
| Cost | What it is | When it bites hardest |
|---|---|---|
| Spread | Gap between the buy and sell price — paid on entry and again on exit | Thin markets, small caps, off-hours |
| Slippage | Difference between expected and actual fill | Fast moves, news, market orders, large size |
| Commissions / fees | Broker charges, platform, data, financing on leverage | High trade frequency; small account sizes |
| Taxes | Tax on realised gains; short-term often treated less favourably | Active trading in a taxable account |
Why frequency is the multiplier
Here's the arithmetic that quietly decides outcomes. Suppose a round trip costs you 0.2% all-in — spread plus slippage plus fees. Trade twice a month and you've spent about 4.8% of your capital on friction over a year. Trade twice a week and it's roughly 20%. Same strategy, same skill, wildly different starting line.
That's why costs belong inside your edge calculation, not as an afterthought. A setup with a positive raw expectancy can be comfortably negative after costs, and you'd never see it if you only tracked win rate. Run the numbers properly in what expectancy really means.
It also explains something people find counterintuitive: two traders with identical accuracy can have opposite results purely because one trades a tenth as often. Doing less is a genuine, underrated edge.
How to cut costs without changing your strategy
- Use limit orders for entries. Crossing the spread on every entry is a voluntary tax. Let the market come to your level.
- Avoid the first and last few minutes of the session unless your strategy specifically needs them — spreads are widest when volume is most erratic.
- Trade liquid instruments. A tight, deep market costs less to enter and exit. Exotic and illiquid names charge you for the privilege on both sides.
- Size sensibly. Orders large relative to available liquidity move the price against you as they fill.
- Cut trade count. Filtering out marginal setups — the ones you take out of boredom — removes their full cost immediately and their losses too.
- Track your real fills. Log expected versus actual price in your trading journal. Most people have never measured their own slippage.
The same logic applies to investing
On the long-term side, the equivalent drag is the fund expense ratio — a small annual percentage that compounds against you for decades. The SEC's guidance on fund costs is blunt about it: fees are paid regardless of whether the fund performs. Same principle, slower clock. More on that in investment fees explained.
Frequently asked questions
Is commission-free trading really free? No. Brokers still earn from spreads, order-flow arrangements, financing, and other fees. Zero commission removes one visible cost, not the total cost of trading.
How much slippage is normal? It depends on liquidity and how you order. The practical answer is to measure your own rather than assume — log intended versus filled price for a month and you'll have a real number.
Do costs matter if I only trade occasionally? Far less, which is precisely the point. Cost sensitivity scales with frequency, so infrequent traders can tolerate wider spreads that would ruin an active strategy.
Costs are one of the reasons a plausible-looking strategy fails in practice. Building expectancy that survives them — and sizing so drawdowns stay survivable — is the core of The Asymmetric Trader's Playbook, $29 (reg. $39). Educational material, not financial advice; no promise of profit.
Source: SEC Investor Bulletin on fund fees and expenses. More in the Make Money guides.