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What Does It Cost to Invest?

Let’s unpack the cost to invest — as well as the true cost of some of your investments over time.

Many individuals jump straight into researching their future investments, but just as importantly is how much you’ll need to get started. It’s one thing to want to purchase $1,000 worth of stocks your first go; it’s another to learn you’ll actually be spending closer to $1,100 after brokerage fees.

Let’s unpack the cost to invest — as well as the true cost of some of your investments over time.

What Does it Cost to Invest?

Depending on which investing option you choose, fees may vary. Full-service brokers tend to charge 1–2% of a client’s managed assets. Some also charge various commissions and fees per transaction to cover the costs of trading. This can amount to hundreds of dollars in a single trade, depending on the worth — and amount — of the stocks.

And, though it may not seem it, that difference between 1% and 2% can make a big difference over time. (Don’t worry — we’ll cover an example in a minute).

For brokers who service smaller investors, there’s typically a small commission charge on every trade, both buying and selling. These fees range anywhere from $2 to $10 per trade with a discount broker.

Note that online brokers charge such fees per security. So, if you purchase ten shares of one stock, your broker will charge you for one trade. But, if you purchase one share of 10 stocks at once, your broker may slap you with 10 separate charges. (How rude!)

And, if you decide to sell these shares anytime soon, you’ll face a charge again for exiting your positions. (Double rude!) Therefore, if you trade frequently, you risk losing more of your investment than you earn in interest. Even if it doesn’t initially look like it.

Let’s break down some of these concepts with a couple of examples.

Types of Fees to Expect

Now that we’ve covered a couple of basic examples of the way fees can eat into your profits, let’s look at a few more fees to look out for in your investment journey. Unfortunately, there is no “one size fits all” answer to how much it will cost any particular person to invest. However, we can prepare you with a list of the fees you’re most likely to encounter as you begin your investment journey.

General Trading Fees

Minimum deposit: This amount is the bare minimum a broker will accept if you want to trade under their service. Depending on the broker, this fee can range from $0 to $10,000 or more.

Commission: Commission is a percentage taken off the top by the broker. Many brokers charge according to the total assets under management, while others may charge per new contribution. For a full-service broker, these charges average 1–2%.

Stock trade fee: These may be flat or share-based fees. Flat fees are more common; this means that your broker charges a single price regardless of which stock or how many shares you purchase. Share-based fees charge per share traded (this method is common with day trading brokers).

Broker-assisted trade fee: Brokers who operate over the phone often charge their own fees — note that this is not the same as a robo-advisor. These brokers usually work with clients who don’t have or want access to the internet or who want to deal in specialty shares.

Mutual Fund Fees

Mutual fund trade fees: Mutual funds may be traded online or via phone. Depending on the type of fund you plan to trade, you may have no trade fees on the condition that you keep the fund for a set amount of time. Others may charge commission or flat rate fees.

Note that mutual funds typically charge operating expenses, expressed as an expense ratio (such as in our example above). For instance, an expense ratio of 0.90% charges $9 per year for every $1,000 you invest, while an expense ratio of 1.5% costs $15 per year per $1,000 you invest.

Additionally, watch out for ongoing fees such as:

  • Front-end load fees: Investors pay these fees upon purchase of mutual fund shares
  • Back-end load fees: Brokers charge these fees when you cash out of your fund

Option Trading Fees

There are several fees associated with trading options. You may encounter:

  • Base fees: A flat rate per trade
  • Per-contract fees: These fees are typically structured as commissions on the whole contract, of which there may be several tiers
  • Exercise fees: Many online brokers charge a fee for exercising, rather than closing, your option(s)
  • Assignment fees: Assignment fees are typically charged to clients who have an option automatically bought or sold based on certain conditions

There are other fees as well based on the specific firm and conditions of the trade. Getting familiar with these most common fees is a good place to start.

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Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC (“Quantalytics”). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC (“QAI”), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai’s investment advisory services.

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