Whether you’ve only dabbled in stock trading or you’re an avid trader, you’ve probably seen how quickly commissions and fees can eat up your returns.
NerdWallet’s online brokerage study found that the average investor at the biggest online brokerages (E-Trade, Charles Schwab and TD Ameritrade) executes less than two trades per month. Even at that pace, a $10 trading commission each time could cost as much as $240 a year. If you trade more frequently, you could be looking at thousands of dollars in costs.
Of course, those commissions are reasonable if you’re getting your money’s worth. But many investors are not. NerdWallet’s research found that at big-name brokerages, only 12% of the commissions charged actually went to trade execution; the rest went toward other expenses, such as advertising and operating costs.
Here’s how to find the most economical online broker option for you:
Determine what extras you need
In general, you’ll pay between $4 and $12 per trade at most online brokers. Often, brokers that graze the top of that range have better online stock trading platforms, more advanced analysis tools and premium research. If those offerings are a priority for you, it may be worth paying a higher cost per trade. But many of those features are also available from lesser-known discount brokers: TradeKing, which charges only $4.95 per trade, has a robust trading platform and plenty of research available.
Before you open an account, make a list of the features you want, then search for brokers that offer those. Once you have a field and you’re comparing apples to apples, narrow it down by commissions and fees.
Consider your investing habits
If you trade just once or twice a month, you may not mind a higher commission. But you’re also unlikely to use premium features, so there’s no reason to pay for them. After all, even occasional commissions add up quickly and represent a lost opportunity: That $240 a year could turn into more than $20,000 if invested at 7% over 30 years.
If, on the other hand, you are a more frequent trader, you might get your money’s worth from a broker like TD Ameritrade that offers free access to two premium trade platforms — including one of the best in the business, thinkorswim — and top-tier research. You may also want to consider a broker that offers discounts to high-volume traders.
Prioritize your preferred investments
Most brokerages won’t offer the lowest prices across the board. For example, brokers that offer a large selection of commission-free exchange-traded funds (ETFs) generally have higher stock trading commissions; discount brokers like OptionsHouse may charge only $4.95 per trade, but don’t have any ETFs that trade commission-free.
That means if ETFs are your priority, you’ll want to favor a broker that has a selection of commission-fee funds. If you’re into options trading, you’ll want a broker that has low contract fees and trade commissions.
You’re unlikely to get everything you want at a low price, so select the broker that delivers the features you want and has the lowest commission on the securities you trade frequently.
» MORE: How to Buy Stocks
Look at extra fees
Commissions aren’t the only cost weighing down your brokerage account. Some brokers also charge inactivity fees, and if you’re not a regular trader, they can really eat into your bottom line.
Make sure you’re selecting a broker that aligns with the level of trading you plan to do: If you don’t keep a regular pace or you execute just a few trades a year or even a month, find a broker that doesn’t charge for those lags. If you trade frequently, you might not need to be concerned about inactivity fees, but you should be aware of them.
Other fees to watch out for include broker-assisted trade fees, which can add $20, $30 or more to the cost of your trade, and account closing or transfer fees, which generally range from $50 to $75.
Take advantage of promotions
Online brokers frequently run promotional offers: As a new customer, you can earn months or even a full year of commission-free trading, along with cash bonuses on certain deposit amounts.
Then there are two brokers, Robinhood and Loyal3, that offer free stock trades on a regular basis. Their platforms are limited — Loyal3 especially — but if eliminating commissions is your primary goal, they deliver.
More from NerdWallet:
- Best Online Brokers for Stock Trading
- Free Stock Trading
- Where to Get a Free Crash Course in Investing
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