Fees in online trading are typically referred to as commissions. A generally accepted principle is that the amount paid will be reflective of the service and benefit provided. When you see a free option, it’s typically only for an introductory period, or for a certain number of trades. For example, brokerage firm “A” will allow you six free trades and default to a regular commission structure after the orders are fulfilled. Another example is when brokerage firm “B” gives you one month of free trades. Again, a typical commission structure will resume after the stated “month” expires. The benefit to these schemes is that you’re getting something for free. The downside is that once the investor is established with the firm, they’ll find it more of an effort to move to another firm. Joining a firm is always easy, leaving one is often a challenge.
Continuing along the lines of commissions, the normal process is for a broker or platform to charge per trade pricing. The adage “what you pay for is what you get” tends to hold universally true here. Low-cost services will typically allow investors to trade between five to ten dollars per trade, however, don’t expect any service aside from the trade that’s been requested. In other words, if the investor made a mistake they are stuck with the results of the error. Mid-priced service is a little better, but also more expensive. The commissions are typically between ten to fifty dollars a trade. The benefit is that if customer support is needed, it’s included in that pricing. This can also open up other optional services not available at the lower rates. These types of services, of course, vary from firm to firm.
Full-service brokerage firms are another animal. They sometimes will charge up to $150 per trade. The benefit to these firms is that they provide full customer support, and often times a dedicated account representative. They have research and information available that typically wouldn’t be disclosed on a discount trade. In other words, the investors have access to human beings and even advice should they need it. These firms also offer other options for placing orders other than online. Sometimes, an investor may deem it beneficial to have the luxury of a consultant at their demand. The downside to this is that no matter what firm the investor chooses, they make their money on trades, not the value of the portfolio.
Another common event associated with online trading firms are additional fees. This holds especially true with discounted brokerages. It’s not uncommon to be assessed a fee for allowing your account to remain dormant or monthly maintenance. Some will charge you a fee if you need the assistance of a broker or even customer service. These are often times referred to as “junk” fees and are in the fine print. If the investor is just starting out, has limited funds or just casually trading, these fees can add up quickly and reduce the bottom line.
The remaining question is how much is too much? There’s not one simple answer to this question, unfortunately. The best way to figure this out is for the investor to look at their unique situation and determine what they consider “reasonable.” Should they need more support and trade often, it might be worth it to pay a little more per trade, but save on consulting and junk fees. Should the investor just be starting out or has a very tight budget, a discounted firm may be the way to go. This gives the investor a chance to earn a small amount and experience growing pains and the learning curve prior to signing on for a more substantial account. Whatever the investor chooses, it should remain consistent and realistic to their goals and game plan. Investing is meant to be a long-term endeavor and should be treated as such for the greatest success.