Brokerage Fee, Commissions and Costs Explained

Jan 2019
Brokerage Fee, Commissions and Costs Explained

Brokerage fee
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.

Brokerage fee
Various brokerage fees

Trading fee

Trading fee occur when you trade. This can be commission, spread and financing rate.

Commission

Commission is fee based on the traded volume or a flat fee per a 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.

Spread

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 loose $1, this is the spread cost.

The wider the spread, the higher the cost.

The stock brokers, 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.

The CFD brokers, like eToro or Plus500, quote a final spread and incorporate their fees into this. This is a wider one than the market spread. On the other hand, they usually don't apply commissions.

Financing rate

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 this borrowed money, you have to pay an 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.

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