What are spreads, commissions, and fees at a brokerage firm?

In the modern financial world, the phrase “commission-free trading” is everywhere. From Silicon Valley startups to century-old Wall Street institutions, the promise of $0 trades has democratized the stock market, allowing millions of new investors to participate with just a few dollars. However, in the world of finance, there is a golden rule: Nothing is ever truly free.

While you may not see a “trading fee” deducted from your balance every time you click buy, brokerage firms are businesses, and they must generate revenue to survive. They do this through a complex web of spreads, hidden commissions, and administrative fees. If you don’t understand these costs, you could be losing thousands of dollars over your investing lifetime without even realizing it.

This guide will pull back the curtain on how brokerages actually make money and show you exactly what to look for before you place your next trade.

Decoding the Bid-Ask Spread: The Invisible Cost of Every Trade

The most common cost in the investing world is also the one that most beginners completely overlook: the spread.

Whenever you look at a stock, ETF, or cryptocurrency, you will see two different prices instead of just one. These are known as the Bid and the Ask.

• The Bid: This is the highest price a buyer is willing to pay for a share.

• The Ask: This is the lowest price a seller is willing to accept for a share.

• The Spread: This is the difference (the gap) between the two.

How the Spread Impacts Your Wallet

Imagine you want to buy a share of a tech company. The “market price” shown on your screen is $100.00. However, when you look closer, the Bid is $99.95 and the Ask is $100.05.

If you place a “Market Order” to buy, you will pay the Ask price ($100.05). If you immediately change your mind and sell it back, you will receive the Bid price ($99.95). In this split second, you have lost $0.10. That ten-cent difference is the “spread,” and it essentially acts as a hidden transaction fee that goes to the “Market Makers” who facilitate the trade.

Liquidity and Spread Size

The size of the spread depends on liquidity.

• High Liquidity: For popular stocks like Apple (AAPL) or Amazon (AMZN), millions of shares are traded daily. The spread is usually only a penny.

• Low Liquidity: For “Penny Stocks” or small-cap companies, there are fewer buyers and sellers. The spread can be massive—sometimes 5% or 10% of the total share price. This is why trading obscure stocks can be so expensive, even if your broker says the commission is $0.

Understanding Brokerage Commissions in the Modern Era

A “commission” is a flat fee charged by a broker for executing a transaction. While $0 commissions are standard for US stocks and ETFs, commissions still exist in other areas of the market.

Where You Will Still See Commissions:

1. Options Trading: Most brokers charge a per-contract fee, typically ranging from $0.50 to $0.65 per contract. If you trade 100 contracts, that’s $65 out of your pocket.

2. Mutual Funds: Many “No-Transaction-Fee” (NTF) mutual funds are available, but if you buy a fund that isn’t on your broker’s preferred list, you might pay a staggering $20 to $50 per trade.

3. International Stocks: If you want to buy shares directly on the London Stock Exchange or the Tokyo Stock Exchange, you will almost certainly pay a high commission, often based on a percentage of the total trade value.

4. Full-Service Brokers: If you use a human financial advisor who places trades for you, they may charge a commission as high as 1% to 2% of the trade value.

Hidden Account Fees: The Silent Profit Killers

While spreads and commissions happen when you trade, account fees happen just for having the account. These are often buried in 50-page disclosure documents that most people never read.

1. Inactivity Fees

Some brokerages charge you a fee if you don’t make a certain number of trades or maintain a specific balance. This is common with smaller “boutique” brokers. They might charge $10 to $25 per quarter if your account stays dormant.

2. Maintenance and Custodial Fees

Generally found in specialized accounts like IRAs or Small Business 401(k)s, these are annual fees for the “administration” of the account.

3. Transfer-Out Fees (ACATS)

This is perhaps the most frustrating fee. If you decide to leave your broker and move your stocks to a competitor, your old broker will likely charge you an ACATS Transfer Fee, which usually ranges from $75 to $100.

4. Paper Statement Fees

In 2026, data is digital. If you still insist on receiving your monthly statements via physical mail, many brokers will charge you $2 to $5 per statement to cover printing and postage.

Payment for Order Flow (PFOF): How “Free” Trading Really Works

If your broker isn’t charging you a commission, how do they pay their thousands of employees? The answer for many discount brokers is Payment for Order Flow (PFOF).

When you submit an order to buy a stock, your broker doesn’t send it directly to the New York Stock Exchange. Instead, they send it to a “Wholesale Market Maker” (like Citadel Securities or Virtu Financial). The Market Maker executes the trade and pays your broker a tiny “kickback” for sending the business their way.

Is PFOF Bad for You?

This is a debated topic in finance.

• The Downside: Critics argue that brokers might send your order to whoever pays them the most, rather than the firm that gives you the best price (widening the spread).

• The Upside: PFOF is what allowed commissions to drop to $0 for the average person, saving retail investors billions in upfront costs.

Margin Interest: The Hidden Cost of Borrowing

If you have a “Margin Account,” your broker allows you to borrow money to buy more stocks than you could afford with your cash alone. While this can double your gains, it comes with a high price tag.

Margin Interest Rates are currently quite high. Depending on the broker and your account size, you could be paying anywhere from 7% to 13% annually on the money you borrow.

Important Warning: Margin interest is calculated daily. Even if your stocks are going up, the interest is eating away at your profits every single night. For most laypeople, avoiding margin is the best way to keep costs low.

Expense Ratios: The Fees Inside Your Investments

Even if your brokerage account is perfectly free, the products you buy inside that account might not be. This is especially true for ETFs (Exchange-Traded Funds) and Mutual Funds.

Every fund has an Expense Ratio. This is an annual percentage taken by the fund manager to cover their costs.

• A “Cheap” Fund: An S&P 500 Index fund from Vanguard or Fidelity might have an expense ratio of 0.03%. ($3 per year for every $10,000 invested).

• An “Expensive” Fund: An actively managed “Growth Fund” might have an expense ratio of 0.75% to 1.50%. ($150 per year for every $10,000 invested).

These fees are “baked in” to the price of the fund, so you never see a bill, but they significantly impact your long-term returns.

The 1% Rule: How Small Fees Compound Into Huge Losses

To a beginner, a 1% fee sounds small. After all, if you have $1,000, 1% is only $10. But in the world of long-term investing, fees are a catastrophic drain on wealth because of opportunity cost.

Imagine you invest $10,000 today and add $500 every month for 30 years, with an average market return of 7%.

• Scenario A (0.10% total fees): You end up with approximately $575,000.

• Scenario B (1.10% total fees): You end up with approximately $460,000.

By paying just 1% more in total fees (spreads, commissions, expense ratios), you lost $115,000 over 30 years. That is money that could have funded several years of retirement. This is why understanding and minimizing fees is the single most effective way to grow your wealth.

How to Minimize Your Brokerage Costs: A 5-Step Checklist

Now that you know where the costs are hidden, here is how you can fight back:

1. Use Limit Orders, Not Market Orders: When buying a stock, use a “Limit Order” to specify the exact price you are willing to pay. This protects you from wide spreads and ensures you don’t overpay during volatile moments.

2. Stick to Low-Cost Index ETFs: Look for funds with expense ratios below 0.10%. There is almost never a reason for a layperson to pay a 1% expense ratio.

3. Check for “Free” Cash Sweeps: Many brokers pay nearly 0% interest on the cash sitting in your account while they lend it out to others. Look for a broker that offers a “High-Yield Cash Sweep” (currently paying 4% to 5%) so your idle money is actually making you money.

4. Avoid Margin Unless Necessary: Unless you are a professional trader with a specific strategy, the high interest rates on margin are rarely worth the risk.

5. Go Paperless: Log into your settings today and ensure all “Paper Delivery” options are turned off to avoid monthly statement fees.

Becoming a Cost-Conscious Investor

The “Zero Commission” revolution has been a net positive for the average person, but it has also made us complacent. We assume that because we don’t see a transaction fee, we aren’t paying anything.

By staying aware of bid-ask spreads, checking for hidden account fees, and being mindful of expense ratios, you can keep more of your money working for you. In the race to retirement, it’s not just about how much you earn—it’s about how much you keep.