Understanding Brokerage Fees

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Contributor, Benzinga
September 26, 2023

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.

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

Q

How much do brokers charge per trade?

A

Charges 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, Fidelity Investments doesn’t charge commission for stock, ETF or options trades, but it charges a $0.65 options contract fee.

Q

What is a good brokerage fee?

A

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, it may charge $100 or more. If you have an account with a discount broker, the average cost falls to approximately $10 per transaction.

Q

Are brokerage fees tax-deductible?

A

No, brokerage fees are generally not tax-deductible. There may be certain circumstances where brokerage fees can be deducted as investment expenses, but this is subject to specific criteria and limitations set by the tax laws. It is advisable to consult with a tax professional or accountant for accurate and up-to-date information regarding tax deductions.