John Jagerson

The Truth Behind Broker Commissions

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This article is brought to you by LearningMarkets.com.

Brokers compete fiercely for online business. Besides products and service, they will try to differentiate themselves within the industry by offering the lowest commissions. It would seem that a straightforward comparison of broker commissions would easily show what brokers are truly leading the low-commission war; however, that is not the case.

This article will discuss the reasons why comparison is difficult and what commission rates you should be paying the most attention to.

Don't Trust Broker Commission Comparison Tables

Most online broker Web sites have a commission comparison table somewhere within their marketing information. Invariably, the major brokers will show themselves as the low-cost leader compared with their competitors.

Disclosing commissions accurately is a regulatory requirement, so how can all brokers show themselves as the cost leader and still be telling the truth?

Brokers charge different commission rates for each kind of trade. Buying 100 shares of stock costs a different amount than buying 1,000 shares, or a mutual fund, or a bond or an option ... you get the idea.

There is an extremely large number of possible trade combinations that will all cost a different amount in commissions. Most brokers can find some combination of trades in which they are the low-cost leader. This combination of trades may look good, but probably does not reflect the way you trade. (Learn 7 Reasons You Need a Broker Who Specializes in Options.)