How brokerage fees are calculated

• Brokerages charge fees for their services, which can be grouped into trading and non-trading fees.
• Brokerage fees are calculated in different ways depending on the type of brokerage and fee: it can be a flat rate, a percentage rate, with minimum and maximum fees, and so on.
• Use a brokerage fee calculator to easily compare brokerage fees.

Brokerage fees can generally be divided into trading fees and non-trading fees. The most important trading fees are listed below, let’s take a closer look at them first. 

• Commission: a commission is charged when you execute any kind of trade on a product, be it a buy or sell order. 
• Spread: this denotes the difference between the buy and the sell price, or in other words, the bid and the ask price.
• Margin rate: trading on margin basically means that you borrow money from your broker to trade. In return, the broker charges you interest for this borrowed money.
• Financing rate or overnight costs: this is charged when you borrow money from a broker to trade (on leverage) and you hold this position for more than a day. 
• Currency conversion fee: this is charged when your transaction requires a currency conversion.

Non-trading fees, meanwhile, are fees charged by your broker for services not directly related to trading. These usually include account maintenance fees, fees for depositing or withdrawing funds, and fees charged if you don't use your account for an extended amount of time (inactivity fee).

Now let’s take a look at the different types of trading fees mentioned above, and see some typical examples of how they are calculated.

Commission

Commissions can be a flat fee (e.g. $1 per trade transaction or $0.05 per share) or a percentage (say 0.1%) of the value of your trade. They can also be volume-tiered, meaning your commission will be different (i.e. lower) if the value of your trade exceeds a certain amount.

Some brokerages may charge a minimum fee (say $1) regardless of the trade value, and may also set a maximum limit that you can be charged (say 1% of trade value). There are also an increasing number of commission-free brokers that do not charge any commission for trading.

Spread

This fee is not a specific dollar or percentage amount; it denotes the difference between the buy and the sell price the brokerage is offering. If you would make a buy and a sell trade at exactly the same time, you would generate a loss.

• For example, if the buy price of share A is $151 and the sell price is $150, if you buy one share and sell it immediately, you will lose $1; this is the spread cost.
• Stockbrokers usually use market spreads for most assets, meaning that they don't incorporate their brokerage fees into the spreads. However, they do typically charge commissions.
• CFD brokers, on the other hand, quote spreads in a way that their brokerage fees are also already included in these. This usually results in a wider spread compared with the "true" market spread. On the plus side, these brokers usually don't generally charge commissions.

Margin rate

This cost is basically an interest you pay to the broker for borrowing their money and using it to trade. It is set as a percentage (say between 1-5%) of the amount you borrowed that you have to pay back, in addition to the borrowed amount (called the principal). 

Financing rate

Also called an overnight cost, it is charged for holding a leveraged position (borrowed money) for more than a day. It is usually expressed as an annual percentage rate, say 1.0%. Naturally, you only pay the proportional amount for the days that you actually used the borrowed money before repaying it.

• For example, if you borrowed $1,000 with a 1% financing rate and you paid it back after 10 days, your interest cost will be $1,000*1%, or $10, multiplied by 10/365 days, which comes to $0.27 interest in total. 

Currency conversion fee

Charged when your transaction requires a currency conversion. The currency conversion fee can be a spread-only fee (similar to the buy-sell spread you may see at a currency exchange booth), but some brokers charge a flat fee or percentage-based commission as well.

Now let’s turn our attention to how non-trading fees are calculated.

Account fees

Also called account maintenance fees, these are usually charged monthly and have a set price. However, most online or discount brokerages do not charge account fees anymore.

Deposit and withdrawal fees

These can also be either a flat amount, or calculated as a percentage of the amount involved. If different currencies are involved (e.g. you are depositing EUR to a USD account), you may also be charged a conversion fee.

Nowadays it is rare for online brokerages to charge a deposit fee, but withdrawal fees are still quite frequent. The broker may also have minimum or maximum amounts for withdrawals, or allow only a certain number of withdrawals a month free of charge.

Inactivity fees

These are charged for specific periods in which the minimum buying or selling activity was not met. This period differs by broker, it can be monthly, quarterly or yearly, and is usually a flat fee charged to your account.

Note that brokers may have different definitions for “inactivity”: some may require you to execute trades, while others accept merely logging in to your account as activity.

Some real-life inactivity fee examples include:

• a $1 monthly inactivity fee charged if you have assets on your account, or if the assets don’t reach a certain limit
• a $50 per year fee if you did not make at least 5 trades a year 
• a $10 monthly fee after one year of inactivity

One way to avoid having to know all the little details of the specific fees of each broker is to use a brokerage fee calculator. These tools use the data you input, which is usually your preferred product and the size of your planned trade, to calculate the specific fee for that particular trade. The calculations generally include all applicable trading fees. Go ahead and try BrokerChooser’s own brokerage fee calculator to calculate exactly how much you will pay in trading fees at a given brokerage, or see which brokerages have the best offer for your planned stock trade.

Further reading:

• Brokerage fees, commissions and costs explained
• How brokerage fees work
• What are the average brokerage fees?
• Is there a difference between brokerage fee and commission?
• How brokerage fees are paid