Contrary to what many day traders would like to believe, the biggest cost of trading stocks is not commissions. Now don't get me wrong. Commissions do matter. Let's say you have a $100,000 portfolio. If you make two trades per week at $29.95 per trade, your annual trading costs are $3,114.80 - more than 3% of your portfolio value. Losing 3% per year to transaction costs will have a huge impact on your portfolio over time. And even if you cut that online commission rate in half - to $15 per trade - you're still paying more than 1.5% per year in transaction fees on a $100,000 portfolio.

But commissions are the least of the costs incurred by traders. Often overlooked are the most damaging costs of trading - taxes and reinvestment risk

By definition, traders trade stocks, which means they rarely hold investments for 12 months or more. Unfortunately, constantly turning over investments means paying taxes on gains at your full tax rate. If you're in the top tax bracket, you'll lose roughly 40% of your gains to Uncle Sam. Compare that to the 20% in taxes you'll pay on investments held for longer than 12 months, and already you can see the true costs of trading.

But what might be the biggest risk of trading is reinvestment risk. When you sell, you have to do something with the money. If you keep sale proceeds out of the market, you are not maximizing the power of time in your investment program. If you put the money into another investment, chances are your new investment will not be any better - and could be much worse - than the stock you sold. Indeed, an academic study conducted a few years ago by Terrance Odean, an economist, showed that individual investors buy stocks they should sell and sell stocks they should buy.

Since I suspect I'm no better at trading stocks than the next guy, I don't do it often. In fact, I've sold only one stock since 1992 - Browning-Ferris Industries - which I unloaded at the beginning of this year.

Unfortunately, I couldn't even get that one right.

I bought Browning-Ferris several years ago because of my expectations that demand for garbage hauling and landfill space would skyrocket. The growth in this industry, however, never materialized. Pricing pressures hindered Browning-Ferris' ability to post sustained earnings growth. Needless to say, Browning-Ferris stock didn't keep pace with the overall market. In fact, when I sold the stock, it was trading below 1994 levels and coming off a lousy 1998 in which the shares dropped more than 23%.

The stock had no story, no momentum. No reason to hold, I told myself. Time to bail. So I did, somewhere in the $20s.

Big mistake

Almost immediately after I sold the stock, it began to surge. And then it happened. On March 8 - about two months after I had dumped the stock in the $20s - Browning-Ferris received a takeover offer from Allied Waste Industries for $45 per share.

$45 per share

Needless to say, selling in January cost me greatly in March when Browning-Ferris popped to over $40 on the takeover news.

In retrospect, I truly was snakebitten by this stock. I held it for years without a whiff of takeover speculation, and the company gets a buyout offer less than two months after I sell. Of course, one could argue that my problem wasn't that I sold, but that I sold too late. Browning-Ferris traded for $40 in 1995 and $38 in 1997 and 1998, so I had my chances. Still, my original point remains irrefutable - trading stocks is tricky business.

Does that mean you should never sell? I still think if the reasons you bought don't materialize, there's no reason to hold the stock. A rapidly rising debt level is another reason to sell since high debt is one of the quickest paths to corporate extinction.

But even when you sell for what you think are the right reasons - as I maintain I did with Browning-Ferris Industries --- the odds are that you'll still get it wrong more often than you get it right.

Think about that next time you contemplate trading stocks.