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Understanding trading and brokerage fees

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If you want to trade on the financial markets or put together an investment portfolio to help you save for the future, then you’ll need to go through a broker. Choosing the broker that’s right for your needs can be a difficult decision. There are numerous brokers out there, and the competition is fierce. Different types of brokers offer various services and charge different brokerage fees. Understanding what those brokerage fees are and what you get for your money is the first step in making an informed choice.

What are trading and brokerage fees?

Brokers charge trading fees in return for making trades on your behalf. They may be structured as a flat fee per trade or a percentage of the assets being bought or sold. In the latter case, this is known as a commission. 

Depending on the broker, flat fees can vary from zero to around $150 per transaction. A commission may be between one and two percent of the assets being traded. For instance, if you are buying $1000 worth of shares, your broker may charge a 1.5% commission, so they get $15, meaning the total amount you pay for the trade is $1015.

These days a percentage-based commission is more common than a fixed trading fee.

Getting the best deal

Before choosing a broker, compare their fee structures and what you are getting for your money. Some brokers may offer more services than you need and will charge accordingly. Read the small print and ask questions if anything is unclear. A reputable broker should have transparent trading fees that are declared upfront. Reading independent reviews is an excellent way to determine if a broker is right for you.

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Many brokers eliminate trading fees on the most common asset classes to attract customers in an overcrowded market. However, these brokers are still in business to make a profit, and that just means you’ll be charged in other less obvious ways. Going for a broker with the lowest trading fees won’t necessarily give you the best value service.

Different types of brokers

There are three broad categories of financial trading brokers: full service, discount, and online. Trading and other fees vary enormously between these three types, with full-service brokers charging the highest fees and online brokers generally being the cheapest. Each type of broker offers different products and services, so it’s important to know what you’re paying for.

Full-service brokers

A full-service broker will offer trading advice and provide research and educational tools, although it’s worth remembering that they will always be biased in terms of their own products. While full-service brokers can offer valuable resources, it’s always worth seeking out independent advice as well. 

Discount brokers

A discount broker doesn’t offer advice or much in the way of additional products. They make trades on your behalf and charge a small amount for this service. If you’re confident about making trading decisions and doing your research, then a discount broker may be your most cost-efficient option.

Online brokers

An online broker is much the same as a discount broker but uses a portal through which you can trade on the financial markets. This is usually the cheapest way to trade, although beginners may find they lose less money by working with a full-service broker, at least until they know the ropes.

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Another solution is to use a robo-advisor to manage your investment portfolio. These algorithm-based services are much cheaper than a human advisor and typically work on your behalf for an annual fee of 0.25-0.75% of assets managed.

Other fees

Fees or commissions per transaction aren’t the only charges you might face from your broker. Annual maintenance fees are common in the industry, and some brokers levy an inactivity fee if you aren’t trading regularly. You might be charged an additional one-off fee for research or other bespoke tasks with a full-service broker. 

An annual commission on total assets managed by your broker can be a beneficial alternative to trading fees charged by a full-service broker. This means that they will earn more the greater your assets, which gives them a greater incentive to perform well on your behalf. In contrast, their trading fee is the same whether your transaction is successful or not.

When choosing a broker, you should first decide what level of service you need. You should then compare fees in the relevant broker class. Read independent reviews, check terms and conditions thoroughly, and be wary of hidden charges. Then make the decision that’s right for you.