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It’s simple to overlook one thing when learning about brokerage accounts and where and how to invest: brokerage and investment fees. Advertisement.
Investing in the stock market can be a great way to grow your wealth over time. However, before you start buying shares, it’s important to understand the various fees and commissions that can eat into your returns. This guide will help you understand the different types of investment fees, how they can affect your returns, and how to choose a broker that offers competitive rates.
Types of Investment Fees
There are several different types of investment fees that you may encounter, including:
- Brokerage fees: These are fees charged by the broker that houses your account. They can include annual fees, inactivity fees, subscriptions for premium research and data, trading platform fees, and account closing or transfer fees.
- Stock trading fees: Also known as commissions, these are fees charged when you buy or sell stocks. Some brokers offer commission-free trading, while others charge a flat fee or a percentage of the trade value.
- Mutual fund transaction fees: These are fees charged when you buy or sell certain mutual funds. Most brokers charge these fees, but some offer a list of no-transaction-fee funds.
- Expense ratios: These are annual fees charged by mutual funds, index funds, and ETFs. They are expressed as a percentage of your investment and cover the fund’s operating costs.
- Sales loads: These are sales charges paid by the investor to compensate the broker or salesperson who sold the fund. They are typically expressed as a percentage and can range from 3% to 8.5%.
- Management or advisory fees: These are fees charged by financial advisors or robo-advisors for managing your investments. They are typically a percentage of assets under management, a flat fee, or an hourly fee.
- 401(k) fees: These are administrative fees charged to maintain your 401(k) plan. They may be a percentage of your account value or a flat fee.
How Investment Fees Affect Your Returns
Even a small investment fee can add up over time and significantly reduce your portfolio’s return. For example, if your portfolio is up 6% for the year but you pay 1.5% in fees and expenses, your actual return is only 4.5%. Over time, that difference can really add up.
How to Minimize Investment Fees
There are a few things you can do to minimize investment fees:
- Choose a broker that offers low fees. Many online brokers offer commission-free trading and low expense ratios on their mutual funds and ETFs.
- Invest in index funds and ETFs. These funds typically have lower expense ratios than actively managed mutual funds.
- Avoid sales loads. Choose no-load funds instead.
- Negotiate with your financial advisor. If you are using a financial advisor, negotiate their fees to ensure you are getting a fair rate.
Investing in the stock market can be a great way to grow your wealth, but it’s important to be aware of the fees involved. By understanding the different types of investment fees and how they can affect your returns, you can make informed decisions about how to invest your money.
Frequently Asked Questions
Q: What is the average commission charged by stock brokers?
A: The average commission charged by stock brokers varies depending on the broker and the type of account. However, most brokers charge between $0 and $10 per trade.
Q: What is the difference between a commission and an expense ratio?
A: A commission is a fee charged when you buy or sell an investment, while an expense ratio is an annual fee charged by mutual funds, index funds, and ETFs.
Q: What is the best way to avoid investment fees?
A: The best way to avoid investment fees is to choose a broker that offers low fees and invest in index funds and ETFs.
Q: How can I find out how much I am paying in investment fees?
A: You can find out how much you are paying in investment fees by reviewing your account statements or contacting your broker.
Additional Resources
- NerdWallet’s Guide to Brokerage Fees and Investment Commissions
- NASDAQ’s Guide to How Much Investing Really Costs
Disclaimer
This article is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor before making any investment decisions.
How investment and brokerage fees affect returns
Over time, even a small brokerage fee can add up, and several investment fees can drastically lower the return on your portfolio. If your portfolio increased by 6% during the year, but you paid %201 5% in fees and expenses, so your actual return is only $204,000. 5%. Over time, that difference really adds up.
Consider this scenario: an investor deposits $500 per month for a period of five years into a brokerage account; over that period, the investor deposits a total of $180,000 and earns an average annual percentage return of 7%.
|
Total annual investment fees |
Account value after 30 years |
Amount lost to fees |
|---|---|---|
|
0% |
$588,032.77 |
$0 |
|
0.25% |
$561,515.53 |
$26,517.24 |
|
0.5% |
$536,320.22 |
$51,712.44 |
|
1.0% |
$489,628.12 |
$98,404.65 |
|
1.5% |
$447,454.73 |
$140,578.04 |
|
2.0% |
$409,348.84 |
$178,683.93 |
The amount that would be lost over a 30-year period due to fees is displayed in the chart’s final column. An investor who made 2% annual fees payments would forfeit more than $178,000 over the course of three years, nearly equal to the $180,000 that was deposited in the account during that period.
Stock trading fee
Commissions on stock and ETF trades are levied by certain brokerages, although they are presently declining. To avoid them, look for:
If not, the trading fee could range from $3 to $7, based on the online broker. Some brokers offer discounts for high-volume traders.
» New to trading? Heres how to buy stocks
Commissions on your chosen investments should be carefully considered when choosing a broker.
Where to find information: Usually the home page of the broker’s website, particularly if the commission is attractive.