How investment fees can impact your returns

investment fees

It’s a commonplace lament – new traders work out the percentages on their investments and expect to enjoy a healthy reward, only to find that it’s much less than they expected. What has happened? The answer, all too often, is that they’ve been hit by brokerage fees they failed to anticipate. Although regulations require brokers to list all their fees upfront, the information can often be difficult to find and some traders struggle to make sense of it. Understanding fees is essential to working out which broker is best for you and successfully calculating what you are likely to earn.

Why brokers charge fees

Paying fees can feel unfair when you’re using a service which you can’t guarantee you’ll be able to profit from, but from the broker’s point of view, it’s essential. After all, they have to make their money somewhere. What they don’t need to do is charge exorbitant amounts or put the burden of costs on traders who only have comparatively small amounts of money to invest. It’s worth taking your time to look for a broker that won’t overcharge you, especially during your early days as a trader when it’s harder for you to cover the costs.

Transaction fees

Some brokers describe themselves as having new fees. What this usually means is that they charge a small percentage on each individual trade. This can work out well for new traders because if it’s all they do, there will be no need to worry about having payments to make when you’re inactive or having to deal with standing charges which take a far higher percentage of your overall profit than is the case for larger scale traders.

In some instances brokers charge a flat fee on each trade rather than a percentage commission. This can be advantageous if you’re trading in large volumes but is less so if you prefer to make lots of smaller trades. Commissions vary by asset type, however, so you won’t need to worry about being charged the same amount for every forex trade as when buying stock.

Money transfer fees

One common area for fees to be charged is on the movement of funds in and out of your account. Again, this can be a percentage or a flat fee. It’s one to keep an eye on because some brokers use complex systems which make paying in funds simple but getting them back again quite expensive, especially if you’re relying on your trading for income and need to withdraw small amounts frequently.

Currency conversion fees

If you want to get the benefit of trading across multiple jurisdictions you’re going to have to deal with multiple currencies. This is another area where brokers can make money by charging a fee for currency conversion. Most, though not all, require you to keep your funds in a single currency and this is often restricted to your native currency or US dollars, meaning that you don’t have the option of converting your funds elsewhere.

Inactivity fees

One of the most troublesome types of fee for inexperienced traders is the inactivity fee. Some brokers charge this after only a month during which you have made no trades, though there are others which wait as long as a year or have no such fees at all. Over time, inactivity fees can stack up and they can mean that if you’ve been indisposed or simply forgotten about an account (an easy thing to do if you’re giving several brokers a try), you can get a nasty surprise.

Comparing brokers

One of the biggest challenges presented by the variety of fee structures out there is the difficulty it creates in comparing brokers. If you want to compare eToro fees, which are fairly straightforward, with those of a broker with a more complex free structure, the only realistic way for you to go about it is to run some fantasy trades (either using a demo account or running calculations manually) and work out which broker leaves you better off. Consider the way that you would be affected in each case in different situations, and try to factor all these things into your final decision.

When you settle on a broker you like, make sure you search carefully for any hidden fees (reviews can be a big help with this) and make a note of all the fees that apply to your account so you can keep factoring them in as you go. This will make it much easier for you to keep track of your money and avoid disappointment.

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