Brokerage fees are different types of fees that your online brokerage charges when you have an active account with them. They vary from broker to broker and can impact your returns and your overall experience. In this article, we'll cover the basic fee types you might be charged.
Non-trading fees include charges not directly related to trading, such as deposit/withdrawal fees or inactivity fees.
Trading fees are charged when you trade. This can be a commission, spread, financing rate, margin rate or conversion fee. Let's take a closer look at these one by one.
Trading fees explained
Commissions are usually based on traded volume or, alternatively, charged as a flat fee per trade.
On stock trades in European markets, the commission is usually based on the volume of your trade. For example, if you buy 100 BMW shares at €70 apiece and the cost is 0.1% of the volume, you'll pay a commission of €7. That is for the buy leg only; if you sell, the sell leg will have a commission too. Please note that some brokers might have a minimum charge, like €10 per trade.
In the US, in most cases the commission is either a flat fee per trade (for example, $5/trade), or calculated based on the number of traded shares, such as $0.005/share. The latter method is not advantageous for you if the share price is very low, for example under $1. In such a case, it will cost much more to buy, let's say, $1,000 worth of shares, than it would if you bought stocks priced at, say, $100 apiece.
Many brokers offer zero-commission trading for stocks, ETFs and options. US investors especially have a very wide selection of free stock trading apps at their disposal.
Zero-commission is especially useful if you're trading relatively low volumes, like buying stocks for less than $500 per trade, because you won't be hit with any minimum fees the broker might charge.
While most investors rightfully think you can't really beat "zero", there might be reasons why some traders still prefer to pay a low fee for the best execution.
“The headline is zero commissions, but people don’t realize that their custodians could be selling their order flow for money,” says Fidelity spokesman Robert Beauregard.
Also note that commissions are rarely eliminated for other products like bonds, futures, CFDs or forex, so it still makes sense to see how they work.
The spread is the difference between the buy and the sell price, or in other words, the bid and the ask price.
If you make a buy and a sell trade at exactly the same time, you'll generate a loss. This is called the spread cost. For example, let's say the sell price of share XYZ is $150 and the buy price is $151. If you buy one share at $151 and sell it immediately at $150, you will lose $1; this is the spread cost.
The wider the spread, the higher the cost. For the bigger names, such as Apple, Microsoft, etc. the spread cost could easily be just 1 cent per share. Similarly, if you trade currencies, the most frequently traded pairs like EUR/USD will have extremely narrow spreads, while more exotic pairs such as ZAR/JPY tend to have higher spreads.
Stockbrokers, like Interactive Brokers or Saxo Bank, use market spreads for most assets. This means they use the market bid and ask price, and don't incorporate their fees into the spreads. However, they do charge commissions. This method is considered more transparent and in many cases more advantageous for you.
CFD brokers, on the other hand, quote spreads in a way that their 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 apply commissions.
A financing rate or overnight rate is charged when you hold a leveraged position for more than a day. A typical example of this would be a forex trade or a CFD trade. A leveraged position means you borrow money from the broker to trade. For this borrowed money, you have to pay interest (or in certain cases, can also receive interest). This is the financing rate.
Trading on margin basically means that you borrow money from your broker to trade. For example, if you have a margin account at a US stockbroker and deposited $5,000 cash, you may actually buy US stocks worth more than $5,000 if you want, but you'll have to pay interest on the money you borrowed.
The interest rates brokers charge can differ widely. Some brokers still charge 5% or more for USD margin, while others have reduced their rates to 1-2% because the Fed has also slashed interest rates.
A currency conversion fee is charged when your transaction requires a currency conversion.
A currency conversion can occur when you
- trade or
- deposit and withdraw money
in different currencies.
One example of the former would be if you were to buy a USD-denominated share (like Apple) using your EUR brokerage cash account. In this case, the broker first has to convert your EUR to USD; only then can it buy the Apple share for you in USD.
Some brokers will let you do a manual conversion prior to the trade, which might work out better.
As for deposits and withdrawals, a currency conversion may occur if, let's say, you have a USD-based brokerage account and you deposit money from your EUR bank account. The broker first has to convert this money to USD before it can transfer it to your brokerage account.
Conversion fees can seriously hurt your results if you trade frequently. It is usually an implicit fee that is not presented on your fee report. You might not even realize that this is another cost of your trading.
You can significantly reduce or even eliminate the conversion fee if you have several sub-accounts denominated in different currencies at the same broker. For example, if you have both EUR and USD brokerage sub-accounts, you can trade in both currencies without being hit by a conversion fee on each trade.
Not all online brokers provide sub-accounts in different currencies. To see which ones do, and exactly how many base currencies each online broker offers, we invite you to check our ultimate comparison table. Scroll down to 'Deposit and withdrawal' and look for 'Number of base currencies'. You can even view the list of available base currencies if you head to the deposit and withdrawal chapter of each broker review.
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We have been preparing awards lists since 2018, based on a strict methodology. See who ranked as the best brokers for 2021.
If fees are the most important criteria for you, you may be interested in our Best discount brokers list. On this list, we only included brokers where you can trade real stocks. This means we excluded brokers where stocks were only offered through CFDs.
If your interest is primarily trading forex, we'd recommend reading our Best discount forex brokers article.
Finally, if you want to learn more about how to buy shares in a company, make sure to read our handy guide.
Let us know what you think in the comments section. Also, if you look for the best discount brokers by country, click here.