3) Brokers and Online Trading: The Costs

by · August 25, 2010

Opening an Account

Choosing a brokerage is not too hard. The best thing you can do is to research about different brokerages and compare. In opening an account, every brokerage has different terms and conditions. It is best to choose one that suits you well. For example, one brokerage may require a minimum deposit of at least $3000, while another only requires a $500 deposit. If you don’t have that much money to start, then the one with the least minimum deposit requirement is better for you. More and more brokerages are also not requiring minimum deposits anymore. You can opt for these brokerages instead.

If you don’t want to pay for a broker’s service at all, then you have another option: you can buy a dividend reinvestment plan (DRIP) directly from a company that offers it.

Commissions and Fees

All brokerages make money from commission on trade. Each brokerage will charge at a different price. It is important to note that cheaper is not always better.

Commissions will vary on many things. One example is the type of trade (e.g. market order versus limit order). Another is the method of trade where prices for online orders will differ from touch-tone phone trades to broker-assisted trades.

Here is a rough guide on what to expect based on commissions:

  • Whether the price is $5 per trade or $200 per trade, any broker will get the job done. However, don’t expect great support or perks from dirt-cheap brokers.
  • Mid-priced discount brokers have better support and additional services for their clients. These discount brokers usually charge between $15 to $30 dollars per trade.
  • Full-service brokers are the most expensive ones. Expect to pay commissions of upwards from $100 to $200 per trade. These brokers give you the best support and service.

The Hidden Fees

Aside from the commissions per trade, there are more fees that brokers might charge you without you knowing it. Although these additional fees are pretty much standard, it is best that you are aware of it. Watch out for the following jargon:

  • Fees for transferring assets both into and out of an account
  • Account maintenance fees
  • Fees for not maintaining a minimum balance
  • Sales charges on certain securities (e.g. loads on mutual funds)
  • Inactivity fees
  • Interest on margin loans

Look these up and understand what it means. It is always a good idea to read the terms and conditions of a brokerage carefully before doing business with them.