Choosing a broker is the first task that must be solved before starting to trade stocks or bonds. The main criteria for this are the reliability of the intermediary and the fees. What are the commissions and how their size affects the choice of a broker is described in this article.
What can a broker charge for?
The broker, being an intermediary between the investor (trader) and the exchange, performs many functions that are regulated by law. Therefore, all offered services and products, regardless of whether they are basic or additional, in most cases are paid by the client.
Before choosing a broker, you need to familiarize yourself with forex concepts, fees, and terms of trade carefully. For some services and products, fees from different intermediaries may not be charged at all or may vary greatly. Also, each of them may have their own unique hidden or additional payments.
Account management fee
After the investor has chosen a broker, a brokerage account is opened to store financial instruments and money, as well as to use them to carry out transactions on the exchange markets. Currently, most online Forex trading companies offer to open an account completely free of charge, while the minimum deposit is also reduced to attract more clients.
However, intermediaries may charge a commission for maintaining an account in the following cases:
- Minimum brokerage fee, if the amount on the client’s account is less than the originally agreed one;
- During training and consultations (paid courses or training);
- For trust management;
- When trading not through the platform, but by phone (in this case, the commission will be determined by the volume of the transaction);
- For currency conversion, if it does not coincide with the one on the client’s account when trading instruments;
- For maintaining an account for trading on the derivatives market;
At some broker companies, most of the commissions are combined into a single one, which is called a subscription fee.
Commission for transactions
Commission for transactions is the main income for the broker company. Fees for this service differ depending on the intermediary. Even in the same tariff plan, commissions for the purchase and sale of assets can vary significantly among themselves. When calculating these payments, a certain percentage of the total transaction amount is usually taken. There are also additional payments for transactions:
- Exchange commission, which is very small (up to about 0.01%) and can be counted separately, but more often it is included in brokerage interest;
- SWAP is a payment charged by an intermediary for the transfer of open positions overnight.
Some brokerage companies, taking a percentage of each transaction, can also set its minimum threshold, which is sometimes unprofitable with a small number of transactions and a small account size.
Commission for deposit/withdrawal of funds
If most companies do not charge a fee for depositing funds, since it is beneficial for both the broker and the investor, then a commission is often required for withdrawing funds. You should pay attention to this immediately when choosing an intermediary, since it is a broker, and not the exchange, that sets the rules for withdrawing money. Usually, the withdrawal fee is 1.5% of the deposit, in rare cases it can be about 0.5%. In addition, special commissions may be charged if:
- Withdrawal is made in another currency;
- The period of time from the moment of making a deposit to the moment of withdrawal is less than one month.
Commission for access to trading platforms
A trading platform or is software that allows a trader to conclude transactions in the stock market and manage their own assets.
In most cases, no fee is charged for software developed by a brokerage company if the amount on the client’s account is greater than some agreed amount. Also, the client will have to pay extra to the broker for installing the trading platform on a device (smartphone, tablet or computer).
How does the commission affect the choice of a broker?
Novice investors try to choose a broker with minimal commissions. However, it should be borne in mind that some payments are abandoned by developing brokerage companies in order to attract investors. When choosing an intermediary, the trader must initially decide on the following nuances:
- With the amount that is ready to spend on the acquisition of assets. The more funds the investor has in the account, the lower the rate he will pay commission to the broker.
- Choose financial instruments and trading styles. If a client is going to receive a large annual percentage, he will have to constantly carry out many transactions.
- Sometimes an investor needs some additional services and products (for example, a mobile platform), which means that he needs to look for an intermediary who has these services cheaper.
Increasing your trading volume is one of the easiest ways to reduce commissions. Since brokers benefit from such clients, they themselves offer lower rates.