How Brokerage Fees Work

Investing costs money. But it's just more than the initial capital that you put up. Most people don't think beyond their initial investment or purchase price and completely forget about the fees involved. These fees are commonly known in the financial industry as brokerage fees. There are two different types of brokerage firms: full service and discount. The differences between the two and the fees they charge are significant. So how much does a broker cost? Here's a brief guide to how brokerage fees work with both types of firms.

What Are Brokerage Fees?

Brokerage fees are any commissions or fees that your broker charges you. Also called broker fees, they are generally charged if you buy or sell shares and other investments, or complete any negotiations or delivery orders. Some brokerages also charge fees for consultations.

Not all fees come packaged under the same umbrella. You may see the following under your brokerage contract or regular statements:

• Annual fees
• Research fees (for investment data)
• Inactivity fees (if you aren't trading regularly)
• Fund fees
• Account fees
• Assets under management (AUM) fees

It's important to be aware of the different types of brokerage fees, as well as the types of brokers available to manage your investments.

Brokerage fees are commonly charged as a flat fee or as a percentage of the transaction executed. In some cases, they may be a hybrid of both of these types. Keep in mind that the fees may vary according to the type of industry and the broker involved. It's always a good idea to ask so you know what to expect to be out of pocket before you complete any transactions.

Full-Service Broker Fees

Full-service brokers are paid commissions. These fees are based on the transactions they execute for their clients. At a full-service broker, you pay a premium for research, education, and advice. But it’s important to remember that full-service brokers are also salespeople.

The average fee per transaction at a full-service broker is $150. This is much lower than in the past but still higher than discount brokers where on average a transaction costs approximately $10. There are also full-service brokers who charge annual fees between 1% and 1.5% of total assets managed for a client and will eschew per-trade charges. If you don’t feel comfortable researching and making your own trades, this is a good option to consider.

Full-service brokers will also have an incentive to perform well because if your portfolio's assets under management increase, this means that they make more for managing them. If you're interested in the full-service broker space, Investopedia has a list of the best full-service brokers.

Discount Broker Fees

Discount brokers became popular with the rise of the internet. Most brokers that fall into this category operate through online portals, allowing you to trade easily with the click of a button.

The majority of discount brokers generally do not offer investment advice. This means that fees tend to be much less than traditional full-service brokers. Trading fees for online discount brokers range anywhere from $4.95 to $20, but most are between $7 and $10. This rate is subject to change since discount brokers are consistently lowering their fees in order to attract more customers and gain market share. Some even offer free trades.

If you do your homework, discount brokers can save you a lot of money when it comes to transaction costs. For those interested in the discount broker space, Investopedia has a list of the best discount brokers.

Do Your Own Research

Most investors don’t bother reading Securities and Exchange Commission (SEC) filings, but SEC filings are available to the public, and the information within them is like taking an open book test. The answers are provided for you. Unlike press releases, a public company must state the facts in its SEC filings. This makes it relatively easy to research stocks. 

Do your research to determine the best options that fit your own personal investment style. This means that you shouldn't jump on the bandwagon just because a trend is hot or simply because the market is moving one way. You have to make sure that any moves you make align with your goals.

As a general rule, revenue growth is the key factor driving stock price appreciation if the broader market is hot. Investors and traders love revenue growth in bull market environments. But if the broader market is cold, net income growth and a strong balance sheet are likely to be the keys to success. Investors and traders like to run to safety for dividends and share buybacks in these environments. But again, make sure whatever moves you make reflect your style.

The Bottom Line

The financial industry has gone through significant changes thanks to the internet. This includes the way we trade. There was a time when your only options were to go to a full-service broker. Now, there are so many options from which financially-savvy investors can choose if they want to trade on their own—and often, at a cheaper rate. If you’re impulsive and/or not willing to do your homework, then you should consider a full-service broker. Otherwise, a discount broker, which allows you to execute trades but does not offer investment advice at a much lower rate, is a better option.