In one of the popular e-trading platforms in the UK, the number of registered customers jumped from a measly 50,000 to 300,000 from January 2020 to December of the same year. Among them, around 60 per cent claimed to be first-time investors.
The average age of customers in the platform stands at 31 years, with women investors making up for 25 per cent of the total customers. The trend seems global, with many online brokers in the USA and other parts of the world experiencing a pretty similar surge in interest.
As one could imagine, experts in the trading and investing sectors wasted no time exploring the reasons behind the sudden rise in retail trading. Some experts pointed to socio-political factors like the boredom of lockdown, availability of free cash, increase in online trading, allure of little to no share trading fees, etc., as the primary reasons.
In addition, some modern brokers offering clients the chance to buy a fraction of the share is another crucial reason. Constantin Gurdgiev, an economics professor at Trinity College, on the other hand, cautions that the perception of lower costs offered by some online platforms is leading to excessive trading from retail investors.
Lower Costs: A Perception or Reality?
While Professor Gurdgiev is someone who knows what he is talking about, it’s time to look into the perception of costs in detail to understand his comment correctly. You see, until a couple of years ago, trading and investments were only accessible to rich people. Big banks and brokers used to cater to people with a certain income, charging them big commissions and fees in the process.
The dynamics have changed significantly since the introduction of commission-free trading. Add to that the ability to buy fractional shares, and you should know why so many people are buying so many securities at once. As fractions cost fractional money and multiple orders don’t cost as much as before, there is no stopping even an average Joey to have a diverse portfolio of stocks, currencies, indices, and whatnot.
Anyways, is there such a thing called commission-free trading? So, how does a broker earn money if they don’t charge a commission? The answer lies in the plethora of fees that are associated with trading and investments. Hence, even if a particular broker doesn’t charge a commission, they still have other avenues to keep afloat and rake in multi-folded profit.
Being aware of these fees can save you from the tinted perception of free trading and plan for the actual reality as a trader or investor. To that point, we will take a deep look into the types of fees that you may incur while trading via an online platform. So, let’s read on, shall we?
Types of Share Trading Fees Charged by Online Brokers
Among the various types of share trading brokers, online brokers seem to be charging the cheapest fees. Sometimes, they can afford to remove the fees and commission on a particular asset altogether as they usually have a lower overhead cost. Anyways, the possible fees that you may incur by trading online are:
1. Account Maintenance Fees
Depending on the broker or e-trading platform, you may have to pay a fee to maintain your trading account. It usually ranges between £0 to £50 for the primary account. However, some brokers may make the basic trading account entirely free to attract more customers to their platform.
2. Premium Subscription Fees
Often, the platforms that charge no fees for maintaining a trading account offer a premium subscription model. In reality, it means that if you want to access premium insights, analysis, news, or research data, you will have to pay a monthly or yearly fee. Whether the cost is similar to your music subscription or something huge depends on the type of broker you choose.
3. Not-so-free Commissions
Even if you opt for a broker advertising commission-free trading, you should look beyond the tagline carefully. Often, these brokers charge no commission for a particular type of asset but then make it up by setting a big spread on another instrument. In general, though, trading on stocks without any leverage is free of commission. But if you want to make a leveraged trade or speculate on CFDs, you will have to pay a fee or commission, or both.
4. Deposit and Withdrawal Fees
Another type of share trading fee includes the cost of deposits and withdrawals. Again, some online platforms may revoke both or one of these fees to facilitate the inexpensive trading experience. The ones who charge a fee tend to save the most significant amount for money withdrawals, creating a perception of low cost and encouraging people to trade more and more.
In addition, you may also incur fees for expert financial advice, premium customer service, currency conversions, automated trading, etc. Investing your pension in curated ETFs and other safe instruments may also cost you a percentage or a one-time fee.
What Does Zero-fee Trading Mean Then?
If you have been reading carefully so far, you know that trading platforms cost money even if they are some online entity. Still, they are some platforms and brokers that claim to be offering zero-fee trading. As the brokers charge no money to open a particular trade or close it, the claim is legitimate. However, it’s in the details where the truth lies.
A zero-fee trading platform may make trading in one asset free and then charge a relatively more significant commission for CFDs, ETFs, indices. Even the so-called zero-fee assets may incur you a fee, albeit in the disguise of 3-6 pips spread with every trade you open. Of course, they can always charge you all the other fees described above and still call them commission-free.
So, read between the lines and take each word with a pinch of salt. Going through your preferred broker’s detailed share trading fees should also help to avoid any misguided perception. Professor Gurdgiev of Trinity College wasn’t talking without substance, after all!
So if you want to get more information based on what we have been talking about take a look at the site of finecobank.co.uk.