If you’ve made it to a point in life where you’re ready to start investing, or at least start thinking about investing, you may consider opening a brokerage account. But is the thought of choosing a brokerage firm foreign to you? You’re not the only one.
Putting your hard-earned money into the market and hoping you’ll get a good return is daunting, but investing is a crucial element of many long-term financial plans. While every investment comes with its risks, a brokerage account can help you research investment options before you make a trade. If you still have questions, a financial advisor could help you choose where to invest.
While brokers have helped individual investors buy and sell stocks, bonds, mutual funds and other types of 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 compare brokerage firms’ offerings and costs, including those listed below, and find the option that’s right for you.
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. Some brokerages have one platform, while others have different platforms designed for beginners or advanced investors. 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.
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 to $10 per online trade for stocks or exchange-traded funds (ETFs). There are also a few brokerages that don’t charge any fees, but you may find that they don’t offer as many services or investment options as other brokerages. And 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 could incur an additional fee (sometimes between $20 to $50) compared to making the same trade online without the additional fee. Mutual fund transaction fees may 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 may 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 determine your needs and compare each firm as a whole, not just the trading fees.
Avoid annual fees. 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 there are a number of brokerages that don’t charge this fee regardless of your account balance.
Inactivity fees can depend on the account type and brokerage. Inactivity fees aren’t as common as some other fees, but a few brokerages charge (anywhere from $50 to $120 a year) if you don’t regularly make trades within your account. Alternatively, you might be able to avoid inactivity fees by maintaining a minimum balance. Keep in mind the costs can vary by account type. Even if you have a brokerage account that doesn’t have an inactivity fee, the same company might charge you for an inactive retirement account.
Don’t overthink account closure or transfer fees. It’s common for a brokerage to charge $50 to $75 to close your account or transfer your holdings to a different brokerage. However, if you do get charged this fee, many brokerages will also reimburse you when you open a new account with them.
Brokerages also commonly offer a bonus if you open a new account, such as cash in your account or credit to offset trading fees. The bonus often varies depending on how much money you put into the account.
Optional services are just that — optional. There are a few services that often cost money but are easy to opt in or out of based on your preferences. For example, you might have to pay a few dollars each month to receive a paper statement instead of an electronic statement. Some brokers also charge a monthly subscription fee, up to about $30 a month, if you want to access their premium research tools. However, there are brokerages with great, free, research tools.
How much could you save by choosing a low-fee brokerage? Unless you’re an advanced investor looking to execute complicated trading strategies or trying your hand at day trading, there are likely 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 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 or $90 worth of stock when you invest $100. Everything being equal, spending the extra $5 means you take an immediate 5-percent loss, plus you miss out on the potential gains that could have come from the additional $5 in stock.
Or, say you have an account that charges a $75 annual fee, and you make 20 trades each year at $10 per trade. If you switched to a brokerage that doesn’t have an annual fee and that charges $5 a trade you’d save $175 each year. Over the next 20 years, that could add up to over $6,823 if you earn a 6-percent return on your investment.
Bottom line: Choosing a brokerage with low fees helps ensure that your money goes towards your investments rather than 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 financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.