Do you ever wonder about the total amount active traders pay to their brokers? Most people are vaguely aware that there are various commissions on specific transactions and fees for certain kinds of activities. However, few know what the big picture looks like from a brokerage firm’s vantage point. It’s educational to spend 30 minutes reading the fine print of your brokerage site’s list of charges.
Most who make an effort to read through all the legalese are surprised to discover that there are many categories of activity that require a small payment on a per-use or annual basis. If you are not currently an account holder with a particular broker, take time to review the following list of the most common expenses you could incur. Note that many of the top firms don’t charge commissions on certain kinds of trading, which is one of the glaring advantages of signing on with a reputable brokerage firm that is completely transparent about all its fees and charges.
The Most Common Expenses for Active Traders
Look at your favorite broker’s website, and there will be a tab or heading labeled “Commissions and
Fees,” or wording very similar to that. In the case of overnight currency holds, note that you can sometimes set up a swap-free forex account to avoid the inconvenience of having to pay or receive small sums.
While every company has its own way of doing things, you’ll probably see some or all of the following:
- Non-Trading: This category is a catch-all for everything not related to making trades. It includes at least two items: inactivity and withdrawal/deposit charges. Additionally, if you have to pay to set up an account, that would be considered a non-trading charge.
- Commission: For some, this is the main expense of buying and selling securities. There are volume-based and flat rate versions. Volume is more common in Europe, while flat rates are widely used in the US. Note that many providers waive commissions on certain kinds of activity, like traditional share buying and selling or forex trading. If you don’t know your broker’s policy, look it up in the legal section of the site or ask a customer service rep.
- Margin: The margin rate is very similar to a finance rate but usually refers to the interest you’re charged on the amount of money you borrow to trade. It’s not just an overnight expense but is a total fee for the use of funds that the broker lends you to enter into a particular transaction.
- Conversion: When you withdraw or deposit funds or make a trade that requires currencies to be converted, there’s a cost to account holders. Brokers tend to handle this expense in many different ways, so check with a customer service rep and find out what you’ll have to pay to do a currency conversion.
- Spread: Spreads are the differences between the buying and selling price. Some firms incorporate their charges, or commissions, directly into the spread and thus do not bill you for a separate commission-based fee. Others list buy and sell prices with the natural, market-based spread but then charge an additional commission on top of that.
- Finance Charges/Rates: You’ll encounter financing fees when using leverage on a position that you hold overnight or longer. In essence, leverage is borrowed money, so it only makes sense that users pay the overnight rate. Check your documentation to see how the provider sets financing amounts if you need to use leverage.
The Special Case of Swaps
If you trade forex, it’s important to know about them because if you hold positions overnight or through a weekend, you’ll either pay or receive money for a swap. It depends on whether your position is long or short. If the interest rate differential is in your favor, you earn a swap payment. Likewise, if the rate between the two currencies in the pair you hold overnight is working against you, then you pay a swap fee.
Whenever traders don’t close out before the end of the day occurs, they are susceptible to making or receiving swap payments. Fortunately, for those who don’t typically want to be bothered with the sometimes-tricky math involved in such calculations, there are swap-free accounts available. It’s also true that some active traders hold faith-based beliefs that don’t allow them to receive or pay an interest-based fee. Check with your brokerage firm to see how they handle this issue and determine if you can sign up for a swap-free account on your own.