Brokerage fees are unavoidable. Even brokers that advertise zero commission trading will make their money via other charges. This is likely to be through widening the spread on tradable assets, monetizing order flow and charging additional fees associated with having an account.
Knowing and understanding the fees a broker will charge you 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. There are many instances where an investor would be profitable if it weren’t for the fees eating away at their profits.
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. Thus, you are effectively paying 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 small 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 small fee. The fee a stockbroker charges can be either a fixed fee per transaction or a percentage fee.
How Much is a Brokerage Fee?
Brokerage fee charges will vary depending on the broker you choose. There are two types of brokers: a full-service broker and a discount broker.
A discount broker will allow 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 will provide a wide variety of services to investors, including many of those mentioned above. However, the extra services offered are usually reflected in the higher fees full-service brokers charge.
Here are some examples of broker fees to get an idea of what we may have to pay to execute a trade:
One of the most prominent stockbrokers in the U.S., TD Ameritrade charges no commission for its online stock, exchange-traded fund (ETF) and options trades. However, other charges are incurred for trading specific contract types (a $0.65 contract fee per options trade) or using the broker-assisted trade option ($25). There are also additional charges for services such as receiving paper statements by mail.
In comparison, E*TRADE also provides commission-free stock and ETF trading and has the same charges for options contracts and broker-assisted trades. So we can consider the costs each broker charges as standard in the industry.
Offering commission-free trades is a small price to pay for brokers as they will make money through other means, such as interest income and portfolio management fees. Moreover, 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 too much.
Why Do Brokerage Charge Fees?
To make money, okay, let’s move on. Just joking, of course — that is their primary goal, but there are other reasons.
For example, a broker that charges no commissions for stock trading will usually make up the money lost through 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.
All in all, 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 just that. Just like the traders and investors joining the platform, brokers are in it to make money.
What About No-Commission Trades?
As mentioned, brokers are able to provide commission-free trading by recouping the loss from elsewhere, but let’s go back to TD Ameritrade and E*TRADE and how they make money despite zero commissions.
E*TRADE makes its money in a few different ways. One of those ways is by monetizing order flow. Clients’ buy and sell orders on the platform will be sent to broker-dealers, exchanges and market centers for execution. However, the company primarily makes its money through net interest income, which is interest earned on the money invested by customers. So, E*TRADE makes up for the loss of revenue through commission-free trading by monetizing its order flow and accumulating interest.
TD Ameritrade generates its revenue via fees for its managed portfolios. An investor who wants to invest their money can put it into a managed portfolio. TD Ameritrade will monitor, allocate and rebalance the portfolio when needed — for a fee, of course. Other ways that TD Ameritrade makes its money is, like E*TRADE, via payment for order flow, net interest income and charging for additional services on the platform.
Other ways some brokers will make up for commission-free trading include:
- 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: While some brokers will offer research and data free of charge. Others will provide it at an extra cost. For example, subscriptions to research and data can come at the cost of up to $30, but a broker such as Fidelity offers it for free.
- 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 popular brokers do not charge deposit and withdrawal fees now, you can still find some that will 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 to 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. Unfortunately, there is no way of avoiding them. Even if you are with a zero-commission broker, they will more than likely be charging you in another way as its service does not just include executing the trades. Therefore, 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
How much do stock brokers charge per trade?
This will vary depending on the broker you are with and the types of trades you are making, but many brokers now offer commission-free stock trading. For example, a well-known broker such as Fidelity Investments does not charge commission for stock, ETF or options trades, but it charges a $0.65 options contract fee.
What is a good brokerage fee?
Depending on the type of broker you are with and the account type you have, fees can vary. If you are with a full-service broker, the average fee per transaction will be around $150. If you have an account with a discount broker, the average cost falls to approximately $10 per transaction.