The Influence of Broker Commission on Your Trading

When it comes to paying commission, broker fee structures can vary greatly. Regardless of how you pay commission to your stockbroker, it can potentially affect the way you trade stocks. Here are a few things to consider about the influence of broker commissions on your trading.

Flat Fee

One of the most common ways that brokers are compensated is with a flat-fee structure. With this type of commission, you are going to pay a certain amount of money every time that you make a trade. This type of fee structure is very common with most of the online discount stockbrokers that you commonly see advertised. For example, you might pay as little as $4 per trade with your broker regardless of how big the order is.

Volume Commission

The other type of commission that you might pay is based on volume. With this type of commission structure, you are going to pay a certain percentage of the total volume of your transaction. For example, you might have to pay 1.5 percent of the total volume of your trade back to your broker. If you trade $1000, you are going to have to pay $15 to the broker in commissions.

Influence

Depending on which type of fee structure you have, it could influence your trading decisions. For example, if you have a flat-fee broker, you may decide to take fewer trades than you would otherwise. This can cause you to miss out on good trading opportunities because you are trying to separate the good trades from the bad trades. Since this is often difficult to do, you will end up missing out on profitable opportunities more often than not.

If you have commissions based on volume, you may be afraid to make large moves. If you make smaller trades, you can negate the impact of commissions on your trading. Therefore, you might be tempted to avoid making a large trade because you fear the commissions that you will have to pay to the broker.

Making up for Commissions

Because of the impact of broker commissions, you might also be influenced to make bad decisions about when to get out of a trade. Considering that the commission from the broker is going to make up a certain percentage of each trade, you will have to do that much better on the trade to make up for that commission. For example, if the broker charges you 1 percent per trade, you are going to have to make an additional 1 percent in return to make up for that. Because of this, you might find yourself changing your trading strategy and holding onto trades longer than you should. When you do this, you will undoubtedly experience some winning trades that turn around to be massive losers. You could find yourself giving up an even bigger percentage of your account trying to make up that small amount of commission that was lost.

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