Fees You Should Be Aware Of May 11, 2022
Zero commission trades may not exactly mean they’re free. What are some trading fees you should be aware of?
Many financial models assume transaction fees to be a negligible expense as they affect the pricing of securities. However, we know there is no such thing as a free lunch. Trading fees (in one form or another) are prevalent and unavoidable. If one were to trade frequently, you should be aware of the hidden fees that can otherwise eat into your profits.
When it comes to trading fees, many investors only think of the commission and ignore the “hidden” fees. This is a common mistake as there are other fees to take note of, such as platform fees and settlement fees. Platform fee is normally charged once per transaction for the usage of the service provider’s platform. For example, GRAB charges a platform fee of SGD 0.30 per ride1.
On the other hand, a settlement fee is the payment for having a service provider settle the transaction, carrying out tasks such as transferring shares and money between the parties involved2. A settlement fee can be charged on a per share basis or by a percentage based on the value of the transaction. For ease of reference, we have compiled a table of the different type of fees to take note of, illustrating the different ways a broker can charge you. In addition, we have also analysed which is the most cost effective for you.
At a glance, using POEMS Cash Plus Privilege Account – Privilege Tier, is the cheapest when you trade above a certain number of shares like 1,000 shares for example. For investors/ traders who make trades with a lower quantity of shares, Broker X or Y in the above example will be cheaper. This is typically for counters that trade at higher prices such as Berkshire Hathaway Class A (BRK.A.US) which is trading at a whopping price of around US$480k and Amazon (AMZN.US) which is trading above USD3,000.
As each broker’s rates differ from one another, there is no one broker that fits every investor’s needs. As shown in the chart above, acquiring 1,000 shares of PLTR.US stock will incur the cheapest fee using POEMS. However, if you’re getting only 1 share, it will be better to go for brokers that charge settlement fees and/ or commission using the cents per share pricing method.
Therefore, solely looking at the commission rates can be misleading and understanding the entire fee schedule will help you in making an informed decision.
When selling US stocks, there are additional fees involved such as the Securities and Exchange Commission (SEC) Fee and the Trading Activity Fee (TAF).
The SEC fee is paid to the regulating party to offset its cost for regulating the equities market3. The SEC fee is charged based on the notional value of the contract. The rate before 14 May 2022 is 0.00051% and the rate will be revised to 0.00229% from 14 May 20224. Thus, a USD$1 Million sell order will incur a SEC fee of USD 22.90.
Similar to the SEC fee, TAF is charged to help the Financial Industry Regulatory Authority (FINRA) offset the cost of supervising and regulating firms5. TAF is charged on a per share basis at US$ 0.000130 per share, with a maximum charge of USD 6.496.
On top of the upfront fees discussed when trading US counters, other ongoing fees may incur. Some of the common fees are American Depositary Receipt (ADR) fees, corporate action charges, foreign shares custody charges, withdrawal fees, statement request fees and so on.
The points discussed are from the cost standpoint. There are other factors that investors must consider when choosing a broker to invest their savings in. Some considerations are broker’s reputation, support availed during trading hours, access to personal Financial Advisor/ Trading Representatives as well as the range of investment products, insurance solutions etc. Regardless of other concerns, trading costs may be the deal breaker for some, and we hope that this article helped investors like you to better understand the costs involved and to look beyond “free commission” when choosing a broker.
You can also read up more on how some fees and charges have affected traders in this article written by The Business Times*.*Please note that to read the full article you require a subscription to The Business Times, however as a free user you can still read the summary of the article.
About the author
Chan Zi Quan (Dealer)
Zi Quan is a US Equity Dealer in the Global Markets Team and specializes in the US and Canadian markets. He is an avid crypto fan and is adept in macro analysis.