A commission is an amount of money which must be paid for a broker’s or advisor’s service of managing a client’s operations or giving advice. The largest part of brokerages’ profit is usually made up of commissions charged on transactions.
Commissions used to be significantly larger in the past before the wide spread of electronic and online tools for trading and investing, and after the mass access to the Internet and the development of online brokerages an average amount of commission has dropped. Nowadays, an average is usually in the range from 3% to 9% depending on the investment type, though other options also exist, and many online brokerages doesn’t have commissions on selling and purchasing stock at all.
Features of commissions
Commissions might come in the forms of a flat rate or a percentage of the deal, depending on the broker, and details may vary to a great degree. So, it’s important to make everything clear before hiring a broker or an advisor to understand the full amount of their commissions and, accordingly, the cost of service.
Commissions might be charged on different types of operations, including filling, cancelling and modifying an order, though placing an order without filling it is usually not charged.
It’s also crucial to note that commission rate on futures are paid per contract, and consider this fact when making calculations (for example, a transaction of 10 orders is 10 times more expensive than a transaction of 1 order). It’s also necessary to consider a round-turn commission rate when comparing commission rates of different brokers. Otherwise, the information of how much you will be charged might be imprecise.
How a commission is charged
Typically, commissions as a form of payment are used by brokers who not just assist their clients with the transactions, but also provide advice and related services. Commissions might vary from $30 to more than several hundreds of dollars.
A commission is charged every time a trade is executed, and is usually summed with the client’s amount of trade (for a trade of purchasing $30000 in shares and a commission of $300 for this operation, the total amount of money spent is $30300).
An amount of commission also depends on the type of the asset, so it’s important when hiring and working with brokers to pay attention to the fact whether they actually serve your best interests or only manage the deals with the biggest profit for them.
Commissions and fees differences
There are different schemes of payment for a broker’s services, and commissions aren’t the one and only way for it. Many brokers charge fees, not commissions, and advertise themselves as fee-based brokers. Though it might seem that commissions and fees work similarly, there is a significant difference between those concepts in the financial field.
Their major differences are:
Commissions are usually charged per transaction and depends on the amount of transaction and a type of assets involved.
Fees are charged annually or for a single operation. They are typically stated in advance, and have no dependence on the asset type. A fee is usually a fixed sum of money or a percentage (usually of assets under management).
Fees are considered to be a more transparent way of payment because they are charged directly to the client, they are easier to keep track of, and a fee-only method seems to be the most attractive for the beginners.