Practical money matters by Nathaniel Sillin
IF YOU’VE made it to a point in life at which you’re ready to start investing, or at least start thinking about investing, you might consider opening a brokerage account. But you’re not alone if the thought of choosing a brokerage firm is foreign to you.
While brokers have helped individual investors buy and sell investments for decades, the relationship and services have changed over time. For instance, rather than calling their brokers, today many investors use a sleek online platform or mobile app to place orders.
Fees associated with maintaining a brokerage account and investing have also changed. Whether you’ve been investing for years or are just diving in, it’s wise to occasionally compare brokerage firms’ offerings and costs, including those listed below, and find the option that’s right for you.
Fees. Trading-platform fees might not be necessary. A trading platform is downloadable software or an online app that you can use to make trades, view real-time quotes and news, perform analysis and set up your trading strategies.
While platform fees can cost hundreds of dollars a month, many high-quality options are completely free. Others are free as long as you meet minimum account-balance requirements.
Costs. Trading fees are common but prices vary. Brokerage trading fees can vary widely depending on the financial product and broker.
Many online brokers charge a flat fee, typically somewhere between $5 and $10 per online trade for stocks or exchange-traded funds, known as ETFs. Some brokers alternatively charge a fee per share, which could be a better option for day traders.
Making a trade over the phone or with the help of a broker rather than on your own online could incur an additional fee, sometimes between $20 and $50.
Mutual-fund transaction fees might be higher than the cost of trading stocks, although some brokers have a list of no-transaction-fee funds. More advanced trading tactics, such as options, also might have additional fees.
Higher trading fees don’t necessarily indicate better service but the fees could help the brokerage firm invest in its trading platform, customer service and research tools. Therefore, you’ll want to compare each firm as a whole, not just its trading fees.
Annual fees. Avoid them. Some brokers charge an annual fee, often around $50 to $75. You might be able to avoid the fee by maintaining a minimum balance in your account, or consider that there are a number of brokerages that don’t charge an annual fee regardless of your account balance.
Account closure or transfer. Don’t overthink fees associated with account closure or transfer. It’s common for a brokerage to charge $50 to $75 to close your account or transfer your holdings to a different brokerage. However, many brokerages will reimburse you when you open a new account with them instead.
Optional services. Such services are just that – optional. A few services, such as paper statements or premium research tools, often cost money but are easy to opt in or out of based on your preferences.
Low-fee brokerages. How much could you save by choosing a brokerage that charges low fees? Unless you’re an advanced investor, there is probably a variety of brokerages that can fulfill your needs. Review the fees you’re paying at your current brokerage, or at a brokerage you’re considering, and compare them with the competition’s offering.
Paying $5 versus $10 per trade might not be significant for every investor. However, that’s the difference between receiving $95 worth of stock or $90 worth when you invest $100. Everything being equal, spending the extra $5 means you take an immediate five-per-cent loss and miss out on potential gains.
Bottom line: Choosing a brokerage with low fees helps ensure that your money goes towards your investments rather than the firm’s overhead expenses. Low-fee brokerages aren’t necessarily worse either. Some still offer high-end services, advanced trading platforms and mobile apps that can satisfy the needs of most beginner or intermediate investors.
Nathaniel Sillin directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.