What it is:
A brokerage fee compensates afor executing a transaction. It is usually, but not always, a percentage of the transaction value. In finance, most often come to mind, but agents and business frequently charge brokerage fees.
How it works/Example:
Let's assume you would like to purchase 100
$35 x 100 = $3,500
$3,500 x .02 = $70
If, several days, weeks or years later, you want to sell the , you probably pay another brokerage fee, again based on the value of the . Let's say the value of the Company XYZ was $50 when you sold. The net amount you would receive from the sale would be:
$50 x 100 = $5,000
$5,000 x .02 = $100
Although most investors would calculate the on the Company XYZ as simply the difference between $5,000 and $3,500 ($1,500 -- or 42.85%), the savvy investor takes brokerage fees into account and knows that the real profit is $4,900 - $3,570 = $1,330 (or 37.25%).
Why it matters:
As we demonstrated in the example above, brokerage fees eat into returns and should be considered when making any
The brokerage fee you pay is often dictated by the type of you use. Full-service provide a of services -- research reports, advice and even tax help. Their clients usually pay high fees in return for these services. Discount brokers, on the other hand, usually focus on executing trades and do little else. Their clients often pay much lower fees. In either case, fee structures also vary based on things like the size of the client's account, the number or size of trades a client makes, the type of trades a client makes, and the kind of account the client has. For example, sometimes a charge a flat rate for trades below a certain level or charge less for online trades.
It is important for investors to understand their trading preferences when evaluating fee structures. For example, an asset-based account, which charges an annual fee in return for zero or greatly reduced brokerage fees, is often more costly for buy-and-hold investors who don't trade often -- in their case, paying a brokerage fee once or twice a year may be far cheaper than giving away a percentage of the account every year.