How Brokerage Fees Work

There are two different types of brokerage firms, full service and discount. The differences between the two and the fees they charge are significant.

Full Service Broker

Full service brokers are paid commissions based on transactions. The average fee per transaction at a full service broker is $120. This is much lower than in the past but still much higher than discount brokers where on average a transaction costs approximately $10.

At a full service broker you are paying a premium for research, education and advice. But it’s important to remember that full service brokers are also salespeople.

There are also some full service brokers that charge an annual fee between 1% and 1.5% of total assets managed for a client who don't charge per trade. If you don’t feel comfortable doing your own research and making your own trades, this is a good option to consider. These brokers will also have an incentive to perform well because if your portfolio performs assets under management increase, meaning they make more for managing them. (For more, see: Fee-Based Brokerage: Will They Work For You?)

Discount Broker

Discount brokers generally do not offer investment advice. Trading fees for online discount brokers range anywhere from $4.95 to $20 but most are between $7 and $10. This rate is subject to change since discount brokers are consistently lowering their fees in order to attract more customers and gain market share. Some even offer free trades. If you do your homework discount brokers can save you a lot of money when it comes to transaction costs. (For more see: Brokers and Online Trading: Full Service or Discount?)

Doing Your Own Research

Most investors don’t bother reading Securities and Exchange Commission (SEC) filings. SEC filings are available to the public and the information within them is like taking an open book test. The answers are provided for you. Unlike press releases, a public company must state the facts in its SEC filings. This makes it relatively easy to research stocks. (For more, see: Using Public SEC Filings to Analyze Companies.)

Also pay close attention to industry trends. If fast casual food chains that offer natural and organic food are in go with the trend, not against it. Do your research to determine best of breed. And you don’t even need to dive that deep. As a general rule, if the broader market is hot, revenue growth will be the key factor driving stock price appreciation. Investors and traders love revenue growth in bull market environments. If the broader market is cold, net income growth and a strong balance sheet will be the keys to success. Investors and traders like to run to safety for dividends and share buybacks in these environments.

The Bottom Line

If you’re impulsive and/or not willing to do your homework, then you should consider a full service broker. Otherwise a discount broker, which allows you to execute trades but does not offer investment advice, is a better option. (For more, see: Paying Your Investment Advisor - Fees or Commissions?)