Understanding Brokerage Fees

Brokerage fees are unavoidable. Even brokers that advertise zero-commission trading make money via other charges. It could widen the spread on tradable assets, monetize order flow or charge additional fees associated with having a brokerage account.

Knowing and understanding broker fees is essential, not just for how much it will cost you to invest or trade but for the impact it will have on your bottom line. In some cases, a trader could be profitable if it weren’t for fees.

What is a Brokerage Fee?

A brokerage fee is a payment charged by a broker to execute transactions on your behalf or provide other brokerage services. You pay the broker to act as an intermediary for the services you are purchasing.

Looking outside of the stock market, for example, when you buy a house, the realtor acts as the intermediary between you and the seller and takes a percentage fee after the deal is closed. A stockbroker acts as an intermediary between you and the stock exchange, executing your orders to them for a fee. The fee a stockbroker charges can be either a fixed trade fee per transaction or a percentage fee.

How Much is a Brokerage Fee?

Brokerage fee charges vary depending on the broker you choose — a full-service broker or a discount broker.

A discount broker allows its clients to invest and trade securities, but it will not offer additional services, such as tax advice, research and data, an account manager, portfolio analysis and advisory services. As discount brokers do not provide other services, you will usually pay a lower fee than investors using a full-service broker.

A full-service broker is a company that provides a wide variety of services to investors. However, the extra services offered are usually reflected in the higher fees full-service brokers charge.

Brokers make money through other means, such as interest income and portfolio management fees. If the broker has the resources and ability to attract a large number of investors and traders, providing commission-free stock trading won’t impact their profits much.

Why Do Brokerage Charge Fees?

Brokerages need to make money to stay in business. A broker that charges no commissions for stock trading can charge other fees such as portfolio management fees and platform charges. It means the broker is able to attract customers by advertising zero-commission trading and not be impacted by the potential money lost.

Brokers may also widen the spread of the assets available to trade to cover the loss of revenue from the lack of commissions. They could also charge withdrawal or deposit fees, charge for paper statements or increase the commission to trade other assets such as mutual funds or contracts such as options.

The end goal for the broker is to maximize profits. If that can be achieved by advertising commission-free trading and charging for other services, then you can be sure the broker will do that. Just like the traders and investors joining the platform, brokers are in it to make money.

Factors That Influence Brokerage Fees

Brokerage fees are important for investing and trading. They can affect an investor's returns. These fees vary widely and are influenced by many factors. Understanding these factors helps investors make better decisions. Key factors include the type of brokerage firm, the level of service, and the complexity of transactions. Market conditions also play a role. Additionally, the investor's account type and trading frequency can impact fees. By looking at these elements, investors can better understand the costs of their investment strategies and choose brokers that fit their goals.

Type of Broker

Brokerage fees often depend heavily upon the type of broker you choose. There are two main types: full-service brokers and discount brokers. Full-service brokers generally charge higher fees. They provide many services, such as personalized investment advice and portfolio management. These added services justify their higher costs. In contrast, discount brokers focus mainly just to execute trades. They offer fewer advisory resources and personalized guidance. Because of this, their fees are much lower. Investors who prefer a hands-off approach or have a clear strategy typically choose discount brokers to save money while trading efficiently.

Trading Volume

Brokerage fees are influenced by your trading volume. Many firms have a tiered pricing system. The more you trade, the lower your fees per transaction. This is beneficial for active traders who make multiple trades daily or monthly. Brokers often offer volume discounts to encourage frequent trading. This can lower overall trading costs for active investors. Some brokers even provide zero-commission trades for high-frequency traders or offer rebates after reaching a certain volume. In contrast, infrequent traders or long-term investors might face higher fees. Understanding your trading frequency can help you choose the right broker and minimize costs.

Asset Class

The asset type you trade can affect your fees. Different classes, like stocks, bonds, and options, have different fee structures. Complex financial instruments, such as options and futures, often have higher transaction costs. This is due to their complexity and associated risks. For example, trading options usually requires paying for contracts in addition to commissions. In contrast, straightforward assets like stocks or ETFs typically have lower fees, especially in liquid markets. Some brokers offer commission-free trading for stocks and ETFs. However, they may charge other fees, like account maintenance or subscription fees, to make up for lost revenue. It's important to understand the fee structure for your specific trades to manage your costs effectively.

Account Size

The size of your brokerage account can affect the fees you pay. Many brokers offer lower fees for clients with larger balances. Investors with significant assets might get perks like reduced commission rates and lower administrative fees. They may also access exclusive investment opportunities and premium features. Larger accounts are more profitable for brokers, especially those that provide wealth management services. Some firms might waive fees, like annual maintenance or platform fees, for high-net-worth clients. However, smaller account holders often face higher relative costs because they don’t qualify for discounts. It is important to consider how much capital you plan to invest and whether your account size can get you lower fees or special offers.

Technology and Tools

Brokerage technology and tools can affect your fees. Brokers with advanced trading platforms, research tools, and real-time market data often charge higher fees. These tools are helpful for traders who need detailed market analysis or use algorithmic trading. However, casual traders or long-term investors may not need these features and might find the extra cost unjustifiable. Discount brokers usually offer basic tools at a lower cost, focusing on efficient trade execution. When choosing a brokerage, consider which tools you need for your strategy and whether you want to pay more for advanced features.

What About No-Commission Trades?

No-commission trades work by eliminating the traditional fees or commissions that you typically pay when buying or selling stocks. Instead of charging a commission on each trade, brokerages offering no-commission trades make money through other means, such as interest on cash balances, payment for order flow or offering premium services for a fee.

 Here is how no-commission trades typically work:

• Payment for order flow: Instead of charging commissions, these brokerages may route customer orders to market makers or other trading venues that pay them for executing the orders. Payment for order flow compensates the brokerages for the cost of executing trades on behalf of their customers.
• Interest on cash balances: Some brokerages may earn interest on the uninvested cash balances held in customer accounts. This interest income helps offset the revenue lost from eliminating commissions.
• Premium services: To generate additional revenue, brokerages may offer premium services or advanced trading tools for a fee. These services typically include access to research reports, advanced trading platforms or personalized investment advice.
• Margin trading and other fees: While the trades themselves may have no commissions, brokerages can still charge fees for other services, such as margin trading, options trading or account maintenance fees. It's important to carefully review the fee schedule of a brokerage to understand all potential costs.
• Widening the spread: This is the difference between the buying and selling price and allows the broker to profit from each trade without charging a commission on tradable assets.
• Research and data: Some brokers offer research and data free of charge. Others provide it at an extra cost. 
• Inactivity fees: If you do not make an investment or trade on your account for a certain amount of time, the broker will charge you.
• Paper statement fees: Some brokers will charge you if you request a paper statement rather than an online one.
• Deposits and withdrawals: While most brokers do not charge deposit and withdrawal fees now, you can still find some that associate a cost with depositing and withdrawing your money. eToro charges a $5 withdrawal fee for requests not made in U.S. dollars.
• Account closings or transfers: Some brokers will charge you for closing your account or transferring to another brokerage. However, this is less common, and most brokers won’t charge for this.

When signing up with a broker that offers commission-free trading, it is vital you research, understand and consider the other costs associated with trading on the platform as it could impact your profitability without you realizing it. You don’t want to hold a few positions for months without checking your account, for example, only to discover the broker has been charging an inactivity fee and eating away at your profits.

What Are Maintenance Fees?

Account maintenance fees are different from the commission and will usually be charged yearly, not based on each trade you take. Account maintenance fees typically cost between $0 and $50 or 0.25% to 1.5% of the account’s value per year. The account maintenance fee incorporates the management and upkeep of the account, including things such as portfolio tracking, providing statements as well as offering research and information.

Thankfully, account maintenance fees are fading and you will find the majority of stockbrokers nowadays will not charge a maintenance fee.

Best Online Stock Brokers

Researching and choosing a broker can be a long and tiresome process. From experience, no broker is perfect, but you should aim to find a broker that is reliable, regulated and charges low fees. Below you can find a list of the best online brokers.

The Name of the Game

Brokerage fees are part and parcel of investing, and you can’t avoid them. Even if you are with a zero-commission broker, it will charge you in another way. Your goal should be to find the broker whose fee structure best suits your trading and investing style so that you are able to maximize your profit potential.

Frequently Asked Questions