5 ways to save on broker commissions if you are a novice investor

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2024-01-15 16:39

It is better to calculate expenses before the first trade in the stock market.

Without investing experience, it's hard to imagine how broker fees affect long-term profits. For example, 3% of the transaction amount seems to be a trifle: from 1,000 it is only 30 rubles. But if you spend 15,000 a month on securities, then the commission for the purchase will amount to 5,400 rubles per year.

But an investor pays a broker not only when purchasing, but also when selling securities. Over time, there are more transactions and commissions too: for account maintenance, currency exchange, storage and accounting of purchased securities. And the longer an investor has been in the stock market, the more he will have to pay.

There are several studies that show how even 1% of commissions eats up up to 20% of profits over a 10-year horizon. A commission of more than 5% will deprive you of almost 80% of your profit in a comparable period of time. This difference is due to the magic of compound interest, which can work both into the hands of the investor and against him.

Why trading on the stock exchange won't work without a broker

The stock exchange is a special platform where you can buy and sell securities: stocks, bonds, shares of exchange-traded funds. Investors invest their money in them and expect to get profit from transactions.

A private investor cannot directly trade assets, so he must find an intermediary. It can be a licensed bank or brokerage company.

The broker buys and sells securities on behalf of the investor and maintains his trading account. Some offer additional services: an investment advisor or a portfolio service in the form of a convenient application. The broker takes a commission for its services.

What commissions can a broker take

As we have already said, a broker helps an investor not only to make transactions on the exchange. Therefore, there can be a lot of commissions.

Commission for a transaction on the exchange. Each time you buy or sell a security, the broker writes off the amount as a percentage of the transaction. There are tariffs with a minimum fixed payment. For example, 0, 025%, but not less than 50 rubles. In addition to the broker, such a commission is charged by the exchange. So, the rate of the Moscow Exchange is about 0.01% of the transaction.

• Account maintenance fee. Not charged by all brokers. The payment amount is debited once a month or daily in equal installments.
• Depository fee. The custodian is an intermediary in the stock market that records and stores all data about the investor's securities. Many brokers do not charge money for this. But if they do, then in a fixed amount once a month and, as a rule, if there was a movement on the account.
• Commission for depositing and withdrawing funds. This is the percentage of the amount that the client deposits or withdraws from his brokerage account to make transactions.

It happens that not all commissions are indicated on the tariff page. Therefore, it is very important to carefully study all the clauses of the contract before concluding it and ask your questions to technical support or consultants in the office.

How to save on broker commissions

1. Choose a broker with a tariff that suits your goals

Even if there is no commission for maintaining an account and a depository, it will not work at all not to pay a broker for services. You can reduce costs if you first decide what you want from the investment and what risk you are willing to bear.

There are two ways to make money on the stock market: invest and speculate.

Passive, or long-term, investors they buy securities and hold them in the portfolio for 5-10 years or more, and they receive income from the growth in the value of shares and dividends.

Speculators, or traders, make transactions at the time of the rise or fall of assets and earn on the difference in value. There can be a lot of purchases and sales, several dozen per day. So speculating on the stock exchange takes a lot of time.

To understand what type of investor you are, you need to answer questions.

• How often are you going to buy and sell securities? Will you keep assets in your portfolio for at least 5 years as an investor? Or how will a trader sell a security when its value changes?
• What is the purpose of buying assets into a portfolio? If you plan to provide yourself with a pension or pay for the education of your children with money from investments, time allows you to invest in conservative instruments with low risk and wait for income. If you have a short-term goal like buying a car or traveling, then you will hardly be able to quickly earn the required amount through passive investing. Therefore, you will have to be a little more active: invest in high-risk instruments or sell and buy securities when the rate changes.

It is important to remember, however, that speculation requires experience. For a novice investor, even if time is tight, it is better to train on traditional strategies and leave trading for later if it is still interesting.

Evgeny Marchenko

Today, due to competition between brokers, commissions are decreasing, and there are practically no depository costs anywhere. Therefore, we can choose a broker for our goals with minimal costs.

For example, for a long-term investor who rarely makes deals, it is more profitable to choose a broker with slightly higher commissions for buying and selling, but at the same time without a monthly fee.

In general, whatever the strategy, it is better to look for offers without a minimum fixed payment per trade. The more an investor makes purchases and sales, the less profitable such tariffs are for him.

Traders or large investors should pay attention to tariffs with a decrease in rates with an increase in turnover: the more you spend, the less you pay.

When the method doesn't work

It is right to look for minimum commissions, but saving does not mean making money. Sometimes, when choosing, it is more important to look at the speed of account replenishment, for example, to give preference to brokers of a bank in which you already have money. For an investor with more or less conservative strategies, speed usually does not matter much. But for a trader who makes money on rate fluctuations, the speed of money transfer can be critical.

It also happens that working with a broker is inconvenient. For example, there is no way to enter the St. Petersburg Stock Exchange, support is not responsible, and fabulous money is taken for the preparation of documents for the tax office. Then you should consider a broker with slightly higher commissions, but with a convenient application and adequate 24/7 support.

If it is still difficult to choose a strategy, go to a broker with a minimum commission, whose services are convenient to use.

What to check

• What are the rates of the broker.
• How the size of the commission depends on the amount of the transaction. Is there a fixed minimum.
• Is there a depository fee and what is the monthly payment. What will happen if you do not use the account and do not conduct transactions.
• Is there a commission for depositing funds to the account.
• What is the commission for withdrawing funds.
• How to withdraw currency. How much to pay for converting currency into rubles and vice versa.
• What tariff can you connect to now (some brokers offer a single tariff for all new clients, others look at the amount with which the investor came). How can you switch to another if circumstances change, for example, if you decide to speculate on the exchange.

Remember that you can always change your broker if something doesn't suit you. True, you will have to wait 5-6 weeks and pay for the transfer of securities and re-registration.

2. Choose a tariff, taking into account the volume of your investments

It is beneficial for brokers to serve investors with large investments and large turnovers, so they classify clients by the number of transactions and the volume of investments.

Owners of impressive capital (from 1 million rubles) can be helped with the management of portfolios, provide access to broad market securities and OTC instruments, as well as reduce commissions.

However, you need to look not only at commissions, but also at the presence of fixed minimum payments. The less an investor plans to invest, the more fundamental it is for him to look for a tariff without them. Otherwise it will be simply unprofitable. So, for the purchase of shares for 1 thousand rubles, the commission without the minimum rate will be 0.3%, or 3 rubles. And with a minimum rate, for example, 10 rubles, you will pay 3 times more. At such rates, the commission ceases to matter for a transaction of 3, 4 thousand. In this case, the commission will be 10, 2 rubles, which is higher than the minimum required payment.

These are random numbers, but they show you how it works in general and whether you should be willing to compromise on mandatory minimum payments. Before choosing a tariff, you can estimate how the broker's prices relate to the amounts that you will invest.

When the method doesn't work

Some brokers connect all new clients to the same tariff, regardless of the amount of capital. On the one hand, it is convenient for beginners with small amounts. But on the other hand, you can get by default a completely unsuitable tariff. In this case, you will need to collect documents and travel to the office to switch to another.

What to check

• How the tariff depends on the turnover and value of the portfolio. For example, if the investor has more than 1 million rubles, does the broker offer a reduced commission for such an amount.
• Is there a minimum amount you need to have on a brokerage account.
• What happens if the investor wants to withdraw some of the money.

Look for commission breaks if you want to invest significant capital.

3. Buy your broker's stock instruments

In addition to stocks and bonds, investment instruments can be purchased on the stock market: ETFs and exchange-traded mutual funds.

These funds own different assets (that is, the portfolios are well diversified, which means they are protected from risks) and sell their shares or shares at a fairly cheap price. And this is convenient for investors.

For example, to independently assemble a portfolio of US stocks, you need to spend at least $ 1,000. Or you can buy a share of the Sber-S&P 500 BPIF for about 1,500 rubles and become a co-owner of the shares of the 500 most expensive public companies in the United States: Apple, Amazon, Microsoft and others.

Different provider companies create their own funds. For example, VTB has a BPIF for the Mosbirzh index, and Tinkoff for gold. If an investor buys a product from his broker, then commissions for selling, buying and custody can be waived.

When the method doesn't work

Often the broker advertises zero commissions per trade, but "forgets" to mention other payments. For example, the buyer of the Tinkoff fund must pay a commission to cover the costs and remuneration of the management company. In total, it will turn out to be up to 1% of the average annual value of net assets.

If you buy funds for a long time, then the amount of a one-time commission per transaction will be insignificant. The annual payment for the maintenance of the fund will have a much stronger effect on the profitability of investments.

Evgeny Marchenko

A long-term client who invests using ETFs or mutual funds should definitely pay attention to the commissions embedded in the product structure. You will not see these payments on a separate line in the broker's report, so it is extremely easy to overlook them.

For example, the majority of domestic BIFs include commissions of about 1%, but some ETF providers can sew up 2-4%, which will turn the real profitability of this product into nothing. For comparison, among foreign ETFs, you can find high-quality options with commissions below 0.2%.

In general, buy your broker's stock instruments only if you know the size of all commissions on them.

What to check

• Does the broker have their own products that are not subject to commission on purchase and sale transactions?
• What additional commissions need to be paid to the buyer of these assets.

4. Buy currency for transactions in large portions

On a stock exchange that trades in foreign securities, an investor may need money from other countries: dollars, euros, pounds. It is convenient to buy them through your broker. As a rule, the exchange rate is more profitable than in an exchange office or a bank.

Some brokers allow you to buy currency from one unit, others - only in lots, for example, 1,000 euros. The lot is more profitable: the commission for the transaction will be lower.

If you don't have enough money, you can gradually top up your account and make purchases less often, but for a larger amount. For example, save rubles every month until you have accumulated enough to buy $ 1,000.

When the method doesn't work

You can collect money to buy a lot on a calm market when there is no strong volatility - sharp ups and downs of securities. If you urgently need to buy a fallen share and there is no time to save up for a lot, then it is better not to miss the right moment.

What to check

• Does the commission depend on the amount or value of the purchased securities or currency.
• What lots are more profitable to buy in bulk at a discount.

5. Catch promotions and bonuses from brokers

If you use it for new customers, you can get promotions as a gift or free service in the first months.

When the method doesn't work

Often, when the promotion ends, the broker transfers the investor to an unfavorable rate. Therefore, before participating in promotions, always study all conditions and restrictions.