How to Keep THIS from Eating Away at Your Bottom Line
It’s not hard to get started as a trader — all you need is a laptop or mobile device, an internet connection, and a brokerage account.
A device and getting connected are pretty self explanatory, but finding the right brokerage account can prove a little bit trickier.
Brokerage fees and commissions can eat away at your bottom line, making it hard to get ahead financially. As an investor, it’s important to understand brokerage fees for all trading levels to help you maximize your earning potential.
Here, I’ll offer a comprehensive overview on the different types of brokerage fees so that you can have a better idea of how to choose the right broker to suit your needs.
What is a Brokerage Fee?
A brokerage fee is an amount charged by a licensed broker to execute transactions or to provide financial services.
Brokerage fees exist across a variety of industries, from real estate to mortgage to insurance. The percentage of the commission or amount of the fee will vary depending on the service and the industry.
For an investor in the stock market, the common brokerage fees are typically associated with executing trades or financial advisement.
As a trader, you’ll encounter three primary types of brokers: full service, discount, and online brokers.
The Importance of Choosing a Cost-Effective Broker
Not all brokers are the same, and no two fee structures are identical. Because they can vary quite widely, it’s extremely important to do a brokerage fees comparison.
Why? Several reasons.
For one, the expense of these fees can add up and can have an effect on your returns. Say that your portfolio is up 10% for the year … awesome, right? But then when you consider that you’ve paid 1.5% in fees, your return is actually just 8.5%. Still good, but not quite as awesome.
For another, you may be surprised to learn that some of the fees aren’t obvious. There might be an advertised rate or percentage that seems quite favorable, but there can be hidden fees associated with your account.
These might include a fee for maintaining a certain balance or a fee for closing your account. It’s good to know about fees like this from the beginning rather than being unpleasantly surprised later.
I should also state for the record that cheaper/lower fees aren’t always better. You truly need to consider your goals when looking at brokers. Sometimes, if they are able to give you exactly what you need, it may be worth paying a little bit more in fees.
How Much Do Brokers Charge?
As I mentioned, every broker will charge a different fee. However, we can look at several brokers to illustrate examples of the potential fees/commissions:
Average Broker Fee
Let’s look at some of the big guys to get a general read on average broker fees.
These are both platforms that I use, and they both have similar offerings and interfaces.
Rather than a per-trade fee, some brokers have trade commissions or different pricing structures.
A platform like Interactive Brokers can be good for trading on margin (I don’t recommend it, but every trader is different), and they have significant assets.
Their pricing structure can be confusing at first, but it’s not too hard to get used to over time.
Per their website, for stocks, ETFs, and warrants, they can charge “a fixed amount per share or a set percent of trade value, and includes all IB commissions, exchange and most regulatory fees with the exception of the transaction fees, which are passed through on all stock sales.”
Depending on the trade, this can be advantageous. However, consider that there’s a significant buy-in here. Interactive Brokers requires a $10,000 minimum deposit to get started, and you have to keep a balance of at least $2,000 in your account at all times.
Mutual Fund Transaction Fees
Different types of investments may come with different pricing structures. Mutual funds are one such example.
Mutual funds are not the same as stocks. They’re more like an investment salad. A mutual fund is a melange of stocks, bonds, and other investments all bundled together.
When you buy a mutual fund, you don’t own shares of the stocks or bonds yourself, but rather shares of the mutual fund. As the overall value of the investments goes up or down, the value of the mutual fund shares follow in kind.
One of the benefits of investing in a mutual fund is that it gives you instant diversification, which can balance out the risk — if one asset goes down, another one might go up, ideally keeping the universe (and your investment) in balance.
If you’re interested in mutual funds, be sure to look closely at the broker’s offerings. First, make sure to check that they even offer them. Some brokers don’t offer mutual funds at all.
If they do offer mutual funds, the next step is to look at the fee structure.
If it’s called an NTF, that’s a good thing. It means ‘no transaction fee,’ and you won’t be charged to trade. However, you might be subject to an early redemption fee if you sell too soon, so be sure to check that out.
Typically, online brokers offer better deals for mutual funds. This is worth noting because fees can be significant, ranging from the NTF noted above or up to $76 via Charles Schwab, as of the time of this writing.
Managing a fund doesn’t always come cheap. There’s a little something called the MER (management expense ratio) that you should research before buying into a fund.
The MER is how much of the fund’s assets are allocated to operating and overall expenses.
This is something well worth exploring because these charges might not be immediately evident. They don’t show up as a charge on your statement; rather, they are reflected in the NAV (net asset value).
The operating expenses have the effect of overall reducing the assets in the fund, which means that your returns will be lower.
Tomorrow we’ll go in-depth about the different types of stock broker fees you might encounter. It’ll help you decide which option is best for you.
See you tomorrow.
Editor, Penny Stock Millionaires
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