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3 Types of Fees Every Beginner Investor Needs To Know

Investing your savings in the market is an easy way to grow your net worth. The market also provides numerous opportunities for people who are risk-averse to diversify their portfolio. However, as an investor, it is important to realize that when it comes to the stock and forex markets, simply buying financial instruments at a lower price and then selling them at a higher price is not enough to make a profit.

Fees play an important role in determining an investor’s success. Therefore, if you don’t factor in the costs of owning and operating a trading account into your strategy, you may end up adopting wrong strategies that could cost you your savings. As a result, before you sign up for an online trading account, you need to be familiar with all the fees that you will potentially incur as an investor. The following are some of the most important fees that every beginner investor should be aware of.

Brokerage fees

Since your broker will be offering you an account and other services that are designed to facilitate your trades, they will require you to pay them a certain amount. Normally, these fees are charged on an annual basis. However, some brokers might offer flexibility, in that they can have a month-to-month charge, especially when it comes to online trading accounts.

The level of services offered by a broker tends to vary from one brokerage service to the next and so it is understandable that the amount that they charge will vary. Some brokers charge a higher amount because they offer additional services such as in-depth research or advanced access. Therefore, while it is always a good idea to opt for a financial institution that charges a low amount, going for the cheapest firm is not always a guarantee of better odds of success.

Trading fees

Unlike brokerage fees, trading fees are charged based on the trades that you make — and not based on the services offered by the financial institution. Generally, these are the fees that you will incur once you start trading. Every time you sell or buy securities, you will incur a charge that normally depends on the type and size of the trade.

Trading fees tend to have the most impact when it comes to trading success. This is because while they may seem minimal, they build up over time. They also affect each and every trade you make and so have a direct impact on whether you will make a profit or not. The good news is that trading commission rates vary depending on a brokerage’s fee schedule. Therefore, you can always shop around for lower fees.

Advisory or management fees

Financial institutions that specialize in running investment funds make their money by charging advisory or management fees. This fee is paid to these managers for their expertise. Therefore, you will incur this fee by virtue of placing your money with these institutions.

As a general rule, you should go for a brokerage or financial institution that charges low fees. This is because the lower the fees that you incur, the higher the chances of you getting a better return on your investment.

However, it is important to note that the fees charged are not always a true reflection of whether a brokerage or financial services firm is better than the next. This is because some institutions offer full-service brokerage services, and so may charge more simply because they provide extra services.

Given how important these fees are to your trading success, you should always ensure that you keep them in mind when coming up with a trading strategy. For example, if the trading fees that you incur on a given trade is 4%, you should make sure that your trading strategy guarantees a return that is above 4%. If it doesn’t, it is a trading strategy that you should definitely discard.

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About the Author: Praveen Unnikrishnan

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