What is a Flat Dollar
A flat dollar represents a fixed dollar amount, generally in the context of fees or commissions paid for services. Contracts that specify flat dollar amounts rather than percentage-based fees remove the size of the transaction from the fee equation. Because of this, flat dollar fees may offer brokers or traders advantages when transaction sizes vary.
BREAKING DOWN Flat Dollar
When brokers charge fees based upon a percentage of a transaction’s value, minimal transactions may yield insufficient charges to make the trade profitable. At the other end of the spectrum, high fees generated by large transaction sizes could discourage traders from making large transactions. Flat dollar fees solve both issues. They offer traders protection at the low end, effectively creating a price floor. At the high end, flat dollar fees increase the value of larger transactions for traders as the flat fee represents a decreasing percentage of the transaction cost.
In areas such as online retail trading, flat dollar fees on stock transactions have generally become the industry standard. For the vast majority of average retail investors, flat fees offer a much more economical option than percentage-based fees. Retail brokers now compete with one another on fee pricing structures to gain the business of cost-conscious investors, providing opportunities for even better value.
Example of a Flat Dollar Fee
To decide whether or not a flat dollar fee makes economic sense, investors might consider how they stack up against percentage-based fees or commissions across a range of scenarios. Investors and traders should also analyze their unique trading styles.
Flat dollar fees generally offer advantages for investors who purchase or sell a relatively large number of shares per trade. Fixed charges will be inversely proportional to the overall size of the transaction. The larger the transaction, the smaller percentage the fee represents. Inversely, smaller transactions will represent a more significant percentage of the trade. Therefore, the size of the flat dollar fee implies a sweet spot where the scope of the deal makes economic sense for the investor.
For example, suppose an online brokerage firm charges $5 per trade.
- Investor A makes a $500 investment, and fees will equate to 10% of the purchase
- Investor B makes a $1,000 investment, and fees will equate to 5% of the purchase
- Investor C makes a $5,000 investment, and fees will equate to 1% of the purchase
Depending on the amount of the commission percentage, investor A would be better off with a broker charging fees based on the value of the transaction. If the broker charges a 5% commission, investor A has less trading overhead. Investor B would see no difference in the cost, and Investor C would see a substantial rise in their cost per trade.