Should Smaller Investors Be Paying More Attention to Fees & Spreads?

The advent of fintech has clearly changed the game for market access all over the world. Before the rise of platforms like Robin Hood, eToro, and Coinbase, the idea that you could simply buy assets without a middleman was an alien one. Now, these fintech platforms are powerhouses, offering financial products to everyone, regardless of budget size.

But if you were to step into the shoes of a small investor, say someone who wished to buy a small amount of Bitcoin every month – let’s say $10 p/m – there are real considerations to make about the fees and conversions of that investment. It’s something that smaller investors should be aware of, especially as a lot of it goes unnoticed.

A significant percentage can be lost in fees and spreads

For instance, consider the Bitcoin purchase in the example above. We all know people who have an attitude of making small investments – dollar-cost averaging – into financial products like BTC, taking a long-term approach and not worrying too much about short-term price action. Some of them actually come off highly prescient, especially if they were DCAing into Bitcoin since the 2010s.

Nevertheless, how much BTC do they actually get for their $10? If using a centralized exchange (CEX) like Coinbase – and we are choosing Coinbase simply as a typical example of a CEX – then there would likely be a purchase fee in the region of $0.99 (quite typical for a standard Coinbase account). Moreover, there is a spread that varies, but something in the region of 0.5% - added to the cost of the transaction. Depending on your deposit method, too, additional fees could apply. A network fee would also apply should you move the BTC to your personal hot wallet or hardware wallet.

The point, as such, is that a significant chunk of your BTC could be lost in fees and spreads. A similar story could be told for small investors in stocks. Now, it does vary, and platforms like Robin Hood will trumpet the fact that commission-free stock trading is offered, but there can be a significant amount of your buying power compromised through fees and spreads for the orders. In short, commission-free does not mean cost-free.

Take the house edge approach

So, what do small investors do? The first thing is to simply be discerning and aware that fees exist. Consider how you would approach casino games vis-à-vis house edge. At DraftKings blackjack site, for instance, there’s a variety of card games with varying house edges, and experienced players will know to choose the option with the best conditions. The same should apply to investment.

The secret is to parse out how much you are paying, how much you are losing, and whether there is a remedy. For instance, most fintech brands offer varying levels of membership, including subscriptions that can help offset some fees and spreads. As a small investor, you should not just jump into these without calculating the overall cost to your investment. For example, Coinbase One costs $29.99 per month and effectively eliminates trading fees, but it’s not suitable for someone buying $10 worth of BTC per month.

Without recommending any platform specifically, we can say that there are some excellent explainer videos on YouTube, which guide users through various pitfalls with fees and spreads on assets as varied as stocks, gold, and crypto. If you are looking at those videos, try to avoid those that are ‘selling’ a specific platform and look for the impartial guides instead. It’s worth taking some time to choose the right platform and marry it up with the type of investor you are. But even a small percentage gain here and there can really add up in the long term for your investments.