Brokers and Online Trading: The Costs

Investopedia: Are you looking for more information on currency trading? Try our Forex Walkthrough, it goes from beginner to advanced.

Opening an Account
Every brokerage has different terms and conditions for opening an account. There is a wide range of minimum deposits, varying anywhere from $500 to $2,500. Make sure you read the fine print beforehand. There is nothing more irritating than spending the time to fill out application forms only to discover you don't have enough money to open an account.

So, you're not loaded? Don't worry, more and more online brokerages don't require a minimum deposit at all.

Another option for those with small bank accounts is a dividend reinvestment plan (DRIP). A DRIP allows you to circumvent brokers by buying stocks directly from the companies that offer them.

Commissions and Fees
Every brokerage charges a different price (called the commission) to trade. The price is usually indicative of the service, so cheaper isn't always better.

• The dirt-cheap brokers who charge $5 to $15 per trade get the job done. Prices are going down all the time and quality is getting better, but don't expect great support or perks.
• The mid-priced discount brokers typically charge anywhere from $15 to $30 per trade. These brokers generally offer better customer support and additional services.
• Expensive brokers come with high costs. In some cases you can expect to spend upwards of $100 to $200 per trade. These brokers are known as full-service, and we'll discuss them in greater detail in the next section.

The prices above are a very rough guide. Commissions on trades vary based on things like the type of trade (e.g. market order versus limit order). Even the method used to do the trade affects the price; commissions are different for online orders, touch-tone phone trades and broker-assisted trades.

The Hidden Fees
In general, the financial industry is excellent at hiding fees and charges under a layer of jargon. Beyond the commissions per trade, look for the following:

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

Make sure you shop around, but bear in mind that many of these fees are standard across the board.