Lesson 3: Trading Commissions – Everything You Need to Know

What Are Trading Commissions?

Trading commissions are direct fees that brokers charge traders for executing buy and sell orders. Unlike spreads, which are built into the price, commissions are separate costs applied to a trade. These fees can be either fixed (a set amount per trade) or percentage-based (a portion of the trade's value).

Key Points:

• Trading commissions are common in stock, ETF, and futures markets.

• Forex brokers often rely on spreads but may combine spreads with commissions in ECN accounts.

• Understanding commission fees is critical for calculating your total trading costs.

Types of Trading Commissions

Fixed Commissions

A flat fee charged per trade, regardless of trade size.

Example: A broker charges $5 per trade, whether you buy 10 shares or 1,000 shares.

Best For:

• Traders making smaller trades.

• Beginners who want predictable costs.

Percentage-Based Commissions

A fee calculated as a percentage of the total trade value.

Example: If a broker charges 0.1% commission and you trade $10,000 worth of shares, the fee is $10.

Best For:

• Traders making larger trades, as fees scale proportionally.

• High-volume traders looking to optimize costs.

Comparing Fixed vs. Percentage-Based Commissions

Feature	Fixed Commissions	Percentage-Based Commissions
Cost Predictability	Consistent cost per trade.	Scales with the size of the trade.
Trade Size Impact	Better for small trades.	More efficient for large trades.
Best For	Beginners, small-volume traders.	High-volume or institutional traders.
Example Cost	$5 per trade.	0.1% of a $10,000 trade = $10.

How to Calculate Trading Commissions

To determine your commission costs, use the following formulas:

1. Fixed Commission Formula: Total Commission = Commission per Trade × Number of Trades

   Example: If the broker charges $5 per trade and you execute 10 trades:$5 × 10 = $50

2. Percentage-Based Commission Formula: Total Commission = Trade Value × Commission Percentage

   Example: If you trade $20,000 worth of shares and the broker charges 0.1%:$20,000 × 0.001 = $20

How Trading Commissions Affect Profitability

Impact on Small Trades

Fixed commissions can disproportionately impact small trades because the fee represents a larger percentage of the total value.

Example:

• Trade Size: $100

• Commission: $5

• Effective Cost Percentage: 5%

Impact on Large Trades

Percentage-based commissions can become more expensive as trade size increases, even if the rate seems low.

Example:

• Trade Size: $100,000

• Commission: 0.1%

• Total Cost: $100

Tips to Minimize Commission Costs

1. Choose Brokers with Low Commissions: Compare fixed and percentage-based fee structures to match your trading style.

2. Use Zero-Commission Brokers: Some brokers offer commission-free trading on stocks and ETFs, reducing direct costs.

3. Trade in Larger Sizes (for Fixed Fees):Consolidate smaller trades into larger positions to reduce fixed fees per trade.

4. Consider Commission Discounts: High-volume traders may qualify for reduced commissions from certain brokers.

Learn More About Trading Commissions

Q1: What are trading commissions? Trading commissions are fees charged by brokers for executing buy and sell orders. They can be fixed or percentage-based.

Q2: Which is better, fixed or percentage-based commissions? Fixed commissions are better for smaller trades, while percentage-based commissions are ideal for large trades.

Q3: How do I calculate commission fees? Multiply the trade value by the commission percentage or use the fixed fee per trade.

Q4: Are there brokers with zero commissions? Yes, many brokers offer commission-free trading on stocks and ETFs, though spreads may still apply.

Q5: How do commissions impact small trades? Fixed commissions can take up a larger percentage of the trade, making small trades less profitable.