Brokerage Fees 101: Everything You Need to Know About Trading Fees
We’ve all been there. You go to buy a concert ticket, or an airline ticket, or maybe a stock trade. Then after you “add to cart,” you see the real price – loaded up with extra fees. Where did those come from?
These extra costs can really add up, making the end price higher. And when it comes to investing, it’s typically brokerage fees that can surprise investors.
Trading platforms and brokerages charge different fees for services, depending on their offerings and your activity. Whether you’re a day trader or a long-term investor, brokerage fees and trading fees can cut into any potential returns.
Read on to learn more about brokerage fees and trading fees, how they work, and how they can affect your potential returns and total investing costs.
What are brokerage fees?
Brokerage fees are charges for different services, such as trade executions or premium services like research. They’re typically based on a percentage of the transaction, a flat fee, or a combination of the two; they are charged by discount, full-service, and online brokers.
Depending on the broker type you select, brokerage fees may add up over the long run, reducing your investment returns.
Fees can be charged in different ways: added into your investment account as a brokerage fee, included in a mutual fund as an expense ratio, or charged as a stock trading commission by a financial advisor.
Some investors may not see these costs, so it’s important to understand different fee types.
What are the common types of brokerage fees?
Fees can vary based on the type of brokerage you use, transaction types, and specialty services. Here are some common ones you should know:
Assets under management (AUM) fees: Typically charged by asset management firms, these fees are based on a percentage of total assets the firm is managing for you.
Management or advisory fee: Typically this is a percentage of your AUM, paid by an investor to a financial advisor or robo-advisor.
Expense ratio: This annual fee is a percentage of your investment in an exchange-traded fund, index fund, or mutual fund.
Mutual fund fees: These additional transaction fees come from buying or selling a mutual fund.
Trade commission (stock trading fee): Charged when buying or selling an investment, investors pay these fees (sometimes called commissions) to a broker or a trading platform for their services. Here are additional fees related to trading:
Commission: Fee paid to the broker executing your trade, based on trading volume or a flat fee.
Margin rate: The investor’s cost from a brokerage for borrowing a margin loan.
Financing rate (overnight rate): The cost an investor pays for borrowing from a brokerage to trade and hold a position for more than a day, such as a forex trade.
Currency conversion fee: The charge comes from a transaction requiring a currency conversion.
Retirement plan fees/401k fees: Investors may see this as an administrative fee for maintaining 401(k) plans. It may be passed on by an employer to plan participants (employees).
Options fees: Investors will typically pay a fixed commission to a brokerage firm and a per contract fee for an options trade, ranging from $5.95 + $1.00 per contract (e.g., total fee for a 10-share trade would be $5.95 + $10 = $15.95). Commission structures will vary based on your broker and the amount of trading that you do with them.
How do brokerage fees work?
Investors can be charged a brokerage fee when buying or selling an investment, but the amount can vary depending on the type of brokerage firm you work with to execute your trades.
If you go through a full-service firm: You may be charged more as these firms offer more products and services such as research, tax planning, and financial consulting. Typically, this rate is 1% to 2% of a client’s managed assets.
Here’s a hypothetical example of a fee-based advisor:
An investor wants to buy 100 shares of company X at $50 per share. The broker may earn a commission of $100 for helping to make the transaction. This number comes from $50 per share x 100 shares equals $5,000. Add the .02 percent commission and the broker earns $100, with a $5,100 total trade cost. This example doesn't take into account any advisory fees that may be imposed on a managed account.
If you go through a discount broker: It typically can still charge fees — but they will probably be lower than with a full-service broker. That’s because there’s a smaller selection of products and services offered and typically no investment advice. Discount brokers can charge a flat fee for each trade transaction, ranging from less than $5 to more than $30 per trade.
Account maintenance fees, which typically cost between $0 and $50 or 0.25% to 1.5% of the account’s value annually, cover an account’s upkeep such as a brokerage giving account statements or research reports.
If you go through an online broker: These brokers typically have the least expensive brokerage fees, because they primarily allow investors to conduct online trading. Plus, these firms usually offer limited customer service. Many online brokers have removed a specific commission fee for trades on stock but commission fees for options or futures trades may still apply. Other fees aside from commissions may still apply, so it’s important to check a firm’s pricing information.
The fees vary and may be based on a per-contract or per-share charge and account maintenance fees can vary between $0 to $50 per account per year.
Who pays brokerage fees?
The investor or a trader, who is buying or selling an asset, may be charged a brokerage fee. This can cover a wide range of services from trade execution fees by the brokerage but also research, data, or maintenance fees.
Are brokerage fees tax deductible?
No, brokerage fees are not tax deductible. This changed in 2018 after the Tax Cuts and Jobs Act became effective. Prior to this, brokerage fees could have been written off as a miscellaneous itemized deduction.
Note: Moomoo Financial and its affiliates do not provide tax advice. Consult a tax professional regarding your specific tax situation.
How do brokerage fees impact returns?
Over time brokerage fees will add up and can diminish any potential returns.
Let’s say you have a portfolio valued at $100,000. You pay an annual fee of 1% and your annual return is 4%. The difference is 3%, which is your actual return.
However, you need to factor in compounding effects. This means the percentage of money earned in addition to your original investment, which in this case is $100,000 plus the earnings from earlier periods.
Over the next 20 years, you would accumulate an additional $28,000 in fees. This number comes out to almost 30% of your initial investment.
Just think if you had invested $28,000 instead and earned 3% over this 20-year time period. This is why it’s important to take a close look at fees before choosing your brokerage.
Note: The example provided is hypothetical and for illustrative purposes only and not intended to be reflective of the results one can expect to achieve.
How can you minimize brokerage fees?
Here are some approaches you can take to potentially reduce the amount of brokerage fees:
Compare different brokers' services and fees. Whether your main goal is to keep costs as low as possible or get guidance when needed, it’s important to assess the whole picture before choosing your broker. Finding the right broker can help cut down on account maintenance fees — and in some cases, they may offer a discount.
Consider either no-fee investments or no-load mutual funds to help cut down on per-trade fees. No-load mutual funds can be purchased directly from either a brokerage firm or investment company, which enables you to avoid additional sales charges because it avoids dealing directly with an investment professional who may charge extra for services. Other fees, such as operating expenses, may still apply.
Stay calm after undergoing a losing investment. When a trade doesn’t go your way, some investors may repeatedly trade to make up for some of a trade’s loss. This can be a common reaction. While an ensuing profitable trade may occur and offset part of the loss, this constant trading activity may bring high commissions that will add up and diminish any potential gain. Keep in mind, constant trading can also end up compounding losses in addition to increased fees.
Where can I find information on a broker’s fees?
Remember to read a broker’s fee schedule and other fine print. You may also find information on a broker’s website or FAQ section. If you can’t find it online, your broker or advisor should provide that information.
What does investing without trading platform fees mean?
Today, it’s common for many online investing platforms to offer $0 commission fee trading on stocks, ETFs, and options. Of course, many investors find the idea of $0 commission fees attractive — so there’s been increased competition among trading platforms to acquire users with this benefit.
On top of $0 commission fees, platforms may also differentiate themselves by offering services such as research, news access, cash sweep accounts, customer service, or free data.
The big question: Do brokerage fees really matter?
Well, it’s not a simple answer. With any type of cost, there’s always pros and cons.
Higher brokerage fees can sometimes come with positive impacts. For instance, paying more in brokerage fees may mean you can receive better service — like paying more for a luxury hotel. From this higher service, you could be in a better position to potentially earn a higher return on your investment, amid those higher fees.
Using a full-service broker can also provide potentially greater expertise and experience. For online brokerages, those charging higher fees than their competitors may bring greater tools to help you research your next investment.
On the other hand, more experienced investors may want to focus on basic services and features and be more independent, seeking less servicing by a brokerage but still taking advantage of their free services. This is when less fees may matter. Paying less may mean more.
Fees or no fees, smarter investment decisions start with research.
Learning about brokerage fees can be overwhelming but a little research can go a long way. One way to start is by first determining an investment strategy.
Taking the time to review different brokerages is crucial, regardless of your investment strategy and goals. This helps you to understand who can best meet your needs. It's also worth considering the potential for higher costs that may come with certain brokerages.
Finally, make it a point to compare the fees charged by different brokerages. This small yet significant step can have big impacts on your investment goals in the long run.