# Where the money goes: spread, fees and slippage

> Every trade starts a little in the red. See the costs that eat small gains and why many tiny trades lose.

- Course: [Trading Basics: How It Works, How Not to Lose Everything](https://productovi.com/courses/trading.md)
- Module: What is trading, and should I even try?
- Lesson 2/32, ~31 min
- Source: https://productovi.com/courses/trading/where-the-money-goes

## Thirty trades, all going up

**Alex Tutor:** Back on your Pebble practice account, today we follow the money. Nora has a puzzle for us.

**Nora:** I made 30 quick trades in Northwind Foods, 100 shares each. The price went up on every single one. And my account is down. Is Pebble broken?

**Alex Tutor:** Not broken. Every trade starts a little in the red. First cost: the screen shows one price, but there are two. The **ask** is the lowest price a seller will take: you buy there. The **bid** is the highest price a buyer will pay: you sell there.

![Nora pays a coin at a toll gate on the way out, one coin already lies at the entry gate, and between them a stall has a buy window set a little higher than its sell window.](https://productovi.com/courses/trading/diagrams/m1-l2-scene.png)

**Alex Tutor:** The gap between them is the **spread**; halfway between is the mid price. Nora's fills were 3 cents worse than the mid each way: she bought at mid plus 3 cents and sold at mid minus 3 cents.

**Sofia:** So every share pays 6 cents for the round trip before anything else happens.

**Alex Tutor:** Check it on the screen Nora saw: bid 48.29, ask 48.35. How wide is the spread?

> **Exercise:** Pebble shows Northwind Foods with a bid of 48.29 and an ask of 48.35. What is the spread, in cents?

**Alex Tutor:** Yes. Second, the **commission**: here it's 2 dollars per round trip. Third, **slippage**: in a fast market the price can move between your click and your fill, usually against you.

**Alex Tutor:** And briefly, a fourth: if you trade with borrowed money, called **leverage**, you also pay a financing cost for every day you hold. We'll come back to leverage; it multiplies losses too.

![Spread and slippage are paid through worse prices on entry and exit, the commission is 2.00 per round trip, and financing with leverage is paid for every day held.](https://productovi.com/courses/trading/diagrams/m1-l2-four-costs.png)

*Only financing grows with every day you hold.*

> **Exercise:** Match each cost with what it means.

**Alex Tutor:** One more look at slippage, because it hides best of all.

> **Exercise:** In a fast market you tap Buy while the ask shows 48.35, and the order fills at 48.37. What are those extra 2 cents?

## One trade, step by step

**Alex Tutor:** Take Nora's first trade. The mid was 48.32 when she bought and 48.42 when she sold: a 10-cent rise. A good call.

**Nora:** And my fills were 48.35 in and 48.39 out.

**Alex Tutor:** So you kept 4 of those 10 cents: 4 cents × 100 shares = 4 dollars. Minus the 2-dollar commission, 2 dollars left. That was one of your best trades.

![Nora buys at the ask, 48.35, and sells at the bid, 48.39: of a 10-cent rise in the mid she keeps 4 cents, 4.00 on 100 shares, and 2.00 after the commission.](https://productovi.com/courses/trading/diagrams/m1-l2-round-trip.png)

*You buy above the mid and sell below it.*

**Sofia:** And the trades where the mid rose only 2 or 3 cents?

**Alex Tutor:** Those lost money even though the price went the right way. First, line up the steps of that best trade.

> **Exercise:** Put the steps of Nora's first trade in the right sequence.

## The break-even move

**Alex Tutor:** Now the key question before any trade: how far must the price move just to get back to zero? That's the **break-even move**.

**Alex Tutor:** Add up the costs per share. Spread: 3 cents in plus 3 cents out. Commission: 2 dollars spread over 100 shares.

**Sofia:** 2 dollars over 100 shares is 2 cents a share.

$$
\text{break-even move per share} = \text{spread in} + \text{spread out} + \frac{\text{commission}}{\text{shares}}
$$

*Break-even move per share, before slippage*

> **Exercise:** For Nora's trades (fills 3 cents worse than the mid each way, 2.00 commission per round trip, 100 shares), how many cents must the mid price rise just to break even?

## All thirty trades

**Alex Tutor:** Now the whole list. Each row shows the mid prices, Nora's fills and the commission.

**Dataset (CSV):** [Nora's 30 trades in Northwind Foods](https://productovi.com/datasets/trading/where-the-money-goes/scalps_costs.csv)

**Nora:** The mid went up on all 30. Added together, that's 158 dollars of gain!

**Alex Tutor:** Before costs, yes. That's the mid-to-mid gain. Now take away the spread and the commission on every trade.

**Sofia:** Spread: 6 cents × 100 shares × 30 trades. Commission: 2 dollars × 30.

> **Exercise:** Nora's 30 trades of 100 shares gained 158.00 mid-to-mid before costs. Each paid 6 cents a share of spread for the round trip and a 2.00 commission. What is the net result of all 30 trades after spread and commission, in dollars? Use a minus sign for a loss.

**Alex Tutor:** Minus 82 dollars from 30 right calls. Now count the trades that made money after costs.

**Nora:** How do I spot them?

**Alex Tutor:** Compare exit_mid with entry_mid in each row. Only a rise bigger than the break-even move, 8 cents, ends in profit.

> **Exercise:** How many of the 30 trades were profitable after spread and commission?

## More trades, more costs

**Where Nora's 158 dollars went**

| All 30 trades together | Gain before costs | Spread | Commission | Net result |
| --- | --- | --- | --- | --- |
| 1–30 | 158 | -180 | -60 | -82 |

**Nora:** But I was right 30 times out of 30! More trades should make it safer, like spreading the risk.

**Alex Tutor:** Every trade pays the same 8-cent toll. When the usual move is smaller than the toll, more trades just add more losses. Being right about direction isn't enough: the move has to beat the costs.

![All 30 of Nora’s trades rose, but only 5 rose more than the 8-cent break-even move; the other 25 rose 2 to 7 cents and lost money.](https://productovi.com/courses/trading/diagrams/m1-l2-break-even-toll.png)

*Being right about direction isn’t enough: the move has to beat the costs.*

**Marc:** That's why I write the break-even move in my journal before each trade. If the move I expect isn't clearly bigger, I skip the trade.

**Alex Tutor:** Try Marc's habit on one of his trades before you answer Nora.

> **Exercise:** Marc trades 100 shares of Northwind Foods with the same costs as Nora: an 8-cent break-even move per share. The mid rises 12 cents between his entry and exit. What does he keep after spread and commission, in dollars?

> **Exercise:** Nora says: "I was right on all 30 trades, so trading more often is safer." Her 30 trades gained 158 dollars before costs and ended at −82 after spread and commission. In 2–3 sentences, explain with these numbers why that's not true.

> **Key ideas**
>
> - You buy at the **ask** and sell at the **bid**; the gap is the **spread**, paid on every round trip.
> - Add the **commission**, **slippage** in fast markets and, with **leverage**, a financing cost for every day held.
> - **Break-even move per share** = spread in + spread out + commission ÷ shares. For Nora: 3 + 3 + 2 = 8 cents.
> - 30 trades went the right way, gained 158 dollars before costs and lost 82 after them. Only 5 made money.
> - More small trades don't spread the risk: they pay the toll more often.

> **Educational, not advice**
>
> This course explains how trading works; it never tells you what to buy or sell. Most people who trade lose money, and you can lose all of it. For taxes and rules, ask a licensed professional where you live.

**Alex Tutor:** Next: costs are one reason most beginners lose. There are a few more, and they show up in a whole year of trading.

- Previous lesson: [Trading vs investing: two different games](https://productovi.com/courses/trading/trading-vs-investing.md)
- Next lesson: [Why most beginners lose](https://productovi.com/courses/trading/why-most-beginners-lose.md)

---
Productovi Learning. Free, no sign-up needed to read.