Brokerage Fee (Sales) - Explained
What is a Brokerage Fee?
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Table of ContentsWhat is a Brokerage Fee?How does a Brokerage Fee Work?Types of Brokerage FeeHow Conversion Fee Works Academics Research on Brokerage Fee
What is a Brokerage Fee?
Brokerage fee refers to a fee that brokers charge you for using any of their specialized services. Brokers are those who arrange and manage a sales transaction. The brokerage fee may apply to things such as sales, purchases, consultations, delivery, and negotiations. These charges from brokers usually have an impact on returns and overall experience.
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How does a Brokerage Fee Work?
All brokerage fees are based on a transactions percentage, either a hybrid of the two or as a flat-rate fee. Note that fees for brokers vary depending on the broker and the industry. In some industries, like in real estate, broker fee has a standard percentage they charge a buyer, seller, or both. In the insurance industry, it is rare for a broker to charge a buyer of a policy. Remember, in the insurance industry, the broker represents the customers interests and not the insurer's. So, they always strive to find the best insurance policies that suit the needs of the customer. The broker usually collects a fee from an individual who purchases the insurance policy.
Types of Brokerage Fee
A brokerage fee is a cost that comes up when you engage in a trade. These charges eat into profits or returns. It is, therefore, important that an investor puts this into consideration during investment. The following are types of brokerage fee: Commission fee: This is a fee charged based on either a flat fee per trade or traded volume. The most common in the European market is the traded volume. Spread fee: Spread is the difference you get between the selling and buying price. When you buy and sell at the same time, you encounter a loss known as spread cost. Let's assume that the purchase price of an Apple share is $151, and the selling price is per share is $150. It means that if you purchase one Apple share at $151 and sell the same at $150, you lose $1. The $1 loss, is what we call to spread the cost. Note that when the spread is wide, the cost becomes higher. Financing rate fee: It is also known as the overnight rate. It is usually charged if someone happens to hold a leverage position for more than a day. A leveraged position is where you borrow cash from a broker for the purpose of trading. There is interest payable for the borrowed money, and this is what we call a financial rate. Conversion fee: This type of fee is charged when you convert your currency. It occurs under these circumstances:
- During trade with different currencies
- When depositing or withdrawing cash in different currencies
How Conversion Fee Works
Lets assume you buy Apple shares from your EUR brokerage cash account. In this case, the online broker will first have to convert the EUR to USD before he or he can purchase the Apple share in USD. There is a cost involved in the currency conversion process. So, if you are a frequent trader, then you should expect a serious negative impact on your results. Remember, this type of implicit charges usually don't reflect on the fee report. It, therefore, means that you are likely not to notice it. However, there is a way you can comfortably avoid this type of fee. Have both a USD and EUR brokerage sub accounts with different currencies at the same broker. The two brokerage subaccounts will eliminate the conversion fee by allowing you to trade in both currencies at any given time.