Brokerage Fee Definition
Brokerage fees are different types of fees that your online brokerage charges you when it provides you any kind of service. The types of these fees are different for various brokers and they can impact your returns and your overall experience.
Various brokerage fees
Trading fee occurs when you trade. This can be a commission, spread, financing rate and conversion fee.
The commission is fee-based on the traded volume or a flat fee per trade. In European markets is usually based on the traded volume. For example, 0.1% of €10,000. In the US is rather calculated as a flat fee per trade or based on the number of traded shares. For example, $5/trade or $0.005/share.
The spread is the difference between the sell and the buy price. With other words, the bid and the ask price.
If you make a buy and a sell trade exactly at the same time, you generate a loss. This is the spread cost. For example, the buy price of the Apple share is $150 and the sell price is $151. You buy one Apple share at $151 and sell it at $150. You will lose $1, this is the spread cost.
The wider the spread, the higher the cost.
The stockbrokers, like Interactive Brokers or Saxo Bank, use market spreads at most assets. It means they use the market bid and ask price, i.e. don't incorporate their fees into spreads. However, they apply commissions. This method is considered more transparent.
Financing rate or overnight rate is charged when you hold your leveraged positions for more than a day. A leveraged position means you borrow money from the broker to trade. For this borrowed money, you have to pay interest. This is the financing rate.
You can hold leveraged positions by buying leveraged products like CFDs or stock index futures or you can literally borrow money from your broker. The latter is called margin trading.
A currency conversion fee is charged when your transaction requires a currency conversion.
The currency conversion occurs when you
- trade or
- when you deposit and withdraw money
in different currencies.
One example of trading is when you buy Apple shares from your EUR brokerage cash account. In this case, the online broker first has to convert your EUR to USD and then can buy the Apple share for you in USD.
The other example when you have a USD based brokerage account and you deposit money to this account from your EUR bank account. The broker has to convert this money first to USD and then can transfer it to your brokerage account.
It can seriously hurt your results if you trade frequently. It is usually an implicit fee not presented on the fee report. You might not even realize this is another cost of your trading.
You can significantly eliminate the conversion fee if you have more subaccounts with different currencies at the same broker. For example, if you have both a EUR and a USD brokerage subaccounts you can trade in both currencies without suffering the conversion fee at each trade.
Not all of the online brokers can provide more subaccounts with different currencies. You can check how many base currencies online brokers provide in our ultimate comparison table. Scroll down to deposit and withdrawal and look for the "Number of base currencies". You can even have the list of the base currencies if you go to deposit and withdrawal chapter of each broker review.
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