One of the essential facets a trader should consider when making decisions on where to carry out their trading activities is online trading commissions. Recently trading commissions have been rapidly reducing due to the internet and the increase in a number of brokers in the retail trading industry.
Types of Trading Commissions
Online brokers provide different trading vehicles. They include:
1. Broker Assisted Commissions
This type of commission happens when you directly communicate with a trader to conduct a trade. This runs approximately 4 to 5 times the normal rate for conducting a trade. The commission applies only when you are unable to conduct online trading and you do not want to risk the extra time needed to place the trade with an automated phone system.
2. Touchtone Commissions
This type of commission happens when you want to make a trade; you call into an automated phone system. This usually runs you two to three times the flat rate for conducting a trade online. It applies when you cannot get to a phone and you do not want to make payment for heavy price tags of communicating directly to a broker.
3. Stock Commissions
Stock commissions are usually quoted as a flat rate or on the basis of per share. These rates can range from $6.99 to $29.99 and are a staple for retail brokers. The per-share commission is provided by direct access brokers since many of their customers are active traders. Currently, several direct access brokers have started to provide a hybrid commission of both per share and flat rate.
4. Options Commissions
This type of commission is traded on the basis of per contract. Each contract stands for 100 shares of a stock. Options commissions can range from $0.7 to $1.25 per contract on each side.
5. Futures Commissions
This commission is the same as options commission. It is charged on the basis of every contract. The commission can run from $0.2 to $1.2 per futures contract on each side. Overall futures commissions are usually less than stocks because each contract has a significant monetary value. Therefore, you can trade a lot without making big commission payments.
6. Forex Commission
There are no trading commissions with forex, you can only perform purchases at the request and sells at the bid. For instance, with EUR/USD, there exists a 2-pip spread. Therefore, if you need to buy one contract, you are required to buy at the request. However, if you need to immediately sell the EUR/USD, you are required to sell at the bid. In each trade, the broker makes $10 per pip in each contract. Even though you are not paying commissions the brokers still make their money off the spread.
With the above different types of trading commissions, it is up to you to decide which structure best suits you. If you are an active trader, the best commission is the one that has direct access brokers. On the other hand, if you are a trader who trades a large sum of money or carrying out several trades each year, the best option is a traditional retail broker because you will be able to save money with the flat trade rate.