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What Are Brokerage Fees?

If you’ve worked with a broker or have approached one recently, you would have come across the term brokerage fee. As an investor, every charge and debit to your investment is worthy of note; so understanding what brokerage fees are is essential.

A brokerage is a firm or company that acts as a broker to an investor. A brokerage also serves as a bridge between an investor and his investments.

Brokerage fees are the fees paid to a broker by an investor to help manage his investments. This fee serves as compensation to your broker for all of the services they give. 

The brokerage fee is not only restricted to the charge on the direct action by your broker to help you make sales or purchases; but, it also covers every other thing your broker does for you as an investor, with its price varying from broker to broker.

How Do Brokerage Fees Work?

When an individual or firm renders their services to you, it’s only pertinent that you pay them. The same goes for a broker and an investor.

Brokers do the actual investment for you. They are the ones who break the ground and serve to ensure your investment portfolio is serviced the right way. 

Brokers help investors secure insurance plans, buy stocks, and even help acquire mortgage loans. As such, they need to be compensated.

This fee can either be determined as a percentage of the transaction an investor made, at a flat fee rate, or both. It all depends on the brokerage firm and the broker an investor uses.

Also, a brokerage fee can be charged monthly, quarterly, annually, or per transaction. For instance – if an investor decides to buy 50 shares from a company at $25 each, your broker can decide to charge you a 3% brokerage fee for the transaction. This means that the total cost of your transaction becomes:

$25×50 shares = $1,250

$1250×3% = $37.5

Therefore $1,250 + $37.5 = $1,287.5

If, after a few years, the investor decides to sell his shares, he’ll also have to pay another brokerage fee based on the current value of the shares.

Let’s say the value of the shares increased to $40 at the time of sales. The net amount you should receive is $40×50 = $2,000. But, there’s the brokerage fee of 3% which becomes $2,000×3% = $60.

This means that you’ll eventually get $2,000 – $60 = $ 1,940 after you’ve sold the shares.

What Is the Average Brokerage Fee?

Brokerage fees for several brokerage firms vary, and it all depends on your broker and how much they are willing to charge you as an investor. However, a standard brokerage fee for full-service brokers is usually 1% – 2% of the client’s managed assets.

How Do Brokerages Make Money?

Although the brokerage fee varies for each brokerage firm, there are a few standard methods almost all brokers share to make money. Brokerages are paid when you make a deposit. Just by paying money to your brokerage account through whatever method, a fee is charged. 

Brokerages are also paid when an investor decides to withdraw funds from their account. Brokerages are also paid when the investors’ part is inactive.

Although this fee was only created to motivate investors to remain engaged. 

Are There Any Hidden Fees?

It is not customary for brokerage firms to say there are hidden fees. But, as an investor, it’s better and profitable for you to go through any document thoroughly before signing.

Most likely you will find terms and conditions that may involve you paying or doing something more. This way, you’re confident nothing is hidden from you by your brokerage firm.

Why Do Brokerage Fees Matter?

Brokerage fees aren’t equal. But they are important. It is essential to understand your brokerage fees and what they’ll be used for before signing any agreement document of the sort.

Are Brokerage Fees Negotiable?

Brokerage fees are negotiable. But the fees depend on your broker, and your agent cannot do much about your broker’s decision. 

If you like the services of a broker but feel there are a few things you won’t be needing from their services, you can try negotiating.

If there’s an agreement that can be reached, then that’s fine. Otherwise, there are a plethora of brokerage firms with amazing services and fees you can afford.

Types of Brokerages

There are three types of brokers available to investors with different services. They are: 

Full-Service Brokerage 

The full-service brokerage offers different services to their investors, such as consultation, estate planning, and other financial services either through the phone or in person. As a result, they earn the highest brokerage fees and are paid for each transaction.

The average fee per transaction a full-service broker gets is $150. So with a full-service broker, you’re paying for premium services.

You should also know that full-service brokers are salespeople.

Discount Brokerage 

The fees for discount brokerages are less than the full-service brokerages. This is because the discount broker doesn’t offer investment advice.

Discount brokers charge a flat fee of $5 – $30 for each trade transaction and an account maintenance fee of about 0.5%. Sometimes, discount brokers can offer you free trades as well.

If you know what you’re doing, discount brokers can save you lots of money from your transaction cost.

Online Brokerage 

Online brokers generally allow investors to conduct online trading. As a result, they have the least expensive brokerage fees. An online broker’s customer service is limited.

Most online brokers have removed specific commission fees for trades on stocks, but commission fees for future trades and options still apply. Account maintenance fees for online brokers range from $0 – $50. Depending on the account and agreement with your online broker, this fee is based on a per-contract or per-share charge.

How Do You Calculate Brokerage Fees?

Brokerage fees can be calculated through spreads and conversion fees. Spreads involve the difference between the buy and sell price, or the bid and ask price. 

Another way investors calculate their brokerage fees is through conversions. The conversion fees are charged when you make a transaction that requires currency conversion.

It can occur when you enter a trade or deposit and withdraw money. The difference in conversion rate determines how much the brokerage fee will be.

Trading Costs

The trading cost, which is also known as the transaction cost, is the cost an investor incurs while transacting on the market. If a forex investor enters a trade, the amount of money earned while on that trade is known as the trading cost.

It can be deducted from the total money spent when transacting and used to calculate the brokerage fee. Also, investors tend to give more attention to trading costs because it can affect the profits they’ll make from that investment.

A higher trading cost can reduce an investor’s returns, while a lower trading cost increases an investor’s return.

Annual Fees

These are the fees a brokerage firm earns by the end of the year. For annual fees, the brokerage fee is calculated by the end of the year and deducted from an investor’s account.

This annual fee can vary from $50 – $75 depending on the type of account an investor has. 

Indirect Brokerage Fees

Indirect brokerage fees are the fees paid to an agent. Here, the investor does not speak to his broker. These fees are usually given on a mutual fund basis. This means that there has to be an agreement between the two parties involved; the investor and his agent.  

Additional Fees

If an investor is meant to make payment for an investment by a due date and the payment is delayed without prior information, then you’re going to be charged an additional fee. These fees are otherwise known as late payment fees or penalty fees.


Brokerage fees are quite beneficial, and if you’re subscribed to a full-service plan, there are lots of incentives you’ll get. You also have a high probability of profits when you invest.

But, if you’re an investor with very minimal knowledge about brokerage fees and how it works, you can always consult a financial advisor for more assistance. They’ll help you understand the basics of brokerage fees and how it’s calculated.