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Do Stock Broker Commissions and Fees really matter?

In this article I am going to discuss stock broker commissions and if they make a significant difference to your bottom line when trading.

If you have read other parts of this site, you may be aware that I only ever trade with discount stock brokers. I never use full service stock brokers.

This video I made talks about the differences.

If you have a few minutes, it may be worth you watching the video as I discuss many reasons why I prefer discount brokers.

There are quite a few brokers that charge less than $5 a trade including Zecco, Tradeking and Optionshouse.

Many full service brokers charge over $100 per trade. There are two main factors that will determine the significance of stock broker fees. Firstly, the size of your account and secondly the number of trades you make. Let's look at an example with this scenario below:

Trading Account size $25,000
20 trades per month/240 a year

If we use this scenario and pay $5 for each trade, our trading commissions for the year would equate to $1,200 (240 trades * $5). This equates to 4.8% of our account balance.

If we use this same scenario, but pay $20 per trade, the annual trading fees would rise to $4,800. This equates to 19.2% of our account balance. This is a significant amount of money you would have to earn just to break even.

It would make less of a difference with a bigger account balance with fewer trades. Let's look at this scenario:

Trading Account size $100,000
100 trades per month/100 a year

At $5 per trade, the stock trading fees would be $500. This is just 0.5% of the account balance.

At $20 per trade, the stock broker fees would be $2,000. This is 2% of the account.

Whilst on a larger account with fewer trades, the chunk you pay your broker in commissions is much lower. It can still make quite a difference.

Conclusion

In conclusion, shopping around for your broker is a good idea. The more trades you make the more you could potentially save.

It is also worth making sure you are aware of any hidden charges your broker may have. Some brokers have extra charges if your account is inactive for a period of time, some have extra charges for penny stocks.

My Discount Stock Brokers and Penny Stock Brokers page can help you learn more about these.