Just How Much Do Individual Investors Lose by Trading?
Read the paperopens doi.org in a new tab
What they found
Using the complete trading records of the Taiwan Stock Exchange from 1995 to 1999, where individuals account for about 90% of volume, the authors calculated the total cost of individual trading. Individuals lost about 3.8% of GDP per year, or roughly 2.2% of their portfolio value, through a combination of bad timing, commissions, and transaction taxes. Institutions gained what individuals lost. Aggressive (market) orders by individuals were the biggest source of losses; passive limit orders actually made money.
What you can use
- In a market dominated by retail, the retail sector as a whole transferred about 2% of its wealth to institutions every year.
- Most of the loss came from aggressive market orders that paid the spread and traded at bad prices.
- Patient limit orders were profitable on average; how you enter matters as much as what you enter.
Caveats
Taiwan in the late 1990s had a transaction tax and different market structure than the U.S. Aggregate results; individual traders varied widely.
Tags: retail, transaction-costs, taiwan, order-type
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.