This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A low-cost stock broker can save the trader thousands of euros over a career, and the savings come from the lower commissions, the tighter spreads, and the lack of platform fees. The trader who picks a low-cost broker keeps more of the returns.
The cost drivers
The first cost driver is the commission. The commission is a flat fee per trade, and the commission is the most visible cost. The commission ranges from €0 at a discount broker to €50 per trade at a full-service broker. The commission is the largest cost for active traders, and the commission is the easiest cost to compare.
The second cost driver is the spread. The spread is the difference between the bid and the ask, and the spread is the broker's compensation for executing the trade. The spread ranges from 0.01 percent on liquid stocks to 1 percent on illiquid stocks. The spread is the largest cost for traders who trade frequently, and the spread is the most overlooked cost.
The third cost driver is the platform fee. The platform fee is a fixed monthly or annual fee for the trading platform, and the platform fee ranges from €0 to €50-€100 per month. The platform fee is the largest cost for traders with a small account, and the platform fee is a fixed cost regardless of the trading activity.
The fourth cost driver is the financing charge. The financing charge is the overnight cost of holding a leveraged position, and the financing charge ranges from 1 percent to 5 percent per year.
The typical ranges
The discount broker charges €0-€10 per trade in commission, with tight spreads on liquid stocks, no platform fee, no inactivity fee, and no withdrawal fee. The total cost is €5-€15 per trade, and the total cost is a small percentage of the typical position size.
The full-service broker charges €20-€50 per trade in commission, with wider spreads, a platform fee of €20-€50 per month, an inactivity fee of €0-€50 per quarter, and a withdrawal fee of €0-€25. The total cost is €50-€100 per trade, and the total cost is a significant percentage of the typical position size.
The market maker charges €0 in commission, with a wider spread. The total cost depends on the spread, and the total cost is hidden in the spread.
How to find a low-cost broker
The first step is to compare the commission. The trader should look for a broker with a low commission, and the trader should compare the commission across three to five brokers. The trader should also check the spread, because the spread is the hidden cost.
The second step is to avoid the platform fee. The trader should look for a broker with no platform fee, and the trader should weigh the platform fee against the cost of an alternative platform. The platform fee is a fixed cost, and the platform fee hurts small accounts the most.
The third step is to avoid the inactivity fee. The trader should look for a broker with no inactivity fee, and the trader should weigh the inactivity fee against the cost of an alternative broker. The inactivity fee is easy to avoid by trading at least once per quarter.
The fourth step is to avoid the withdrawal fee. The trader should look for a broker with no withdrawal fee, and the trader should use a payment method that is free.
The fifth step is to minimize the financing charge. The trader should look for a broker with a low financing charge.
The questions to ask
The first question is the commission per trade. The trader should ask for the commission schedule, and the trader should compare the commission across brokers. The trader should also ask about the spread on the trader's typical products.
The second question is the platform fee. The trader should ask for the platform fee, and the trader should compare the platform fee across brokers. The trader should also ask about the inactivity fee, the withdrawal fee, and the currency conversion fee.
The third question is the financing charge. The trader should ask for the financing charge, and the trader should compare the financing charge across brokers. The trader should also ask about the swap rate, and the trader should look for a broker with a low swap rate.
The fourth question is the minimum deposit. The trader should ask for the minimum deposit, and the trader should compare the minimum across brokers. The trader should also ask about the account types, and the trader should look for an account that matches the trader's needs.
The trade-offs to consider
The first trade-off is the cost versus the service. A low-cost broker offers a low cost but limited service, and a high-cost broker offers a high cost but a wide range of services. The trader should match the broker to the trader's needs, and the trader should not pay for services the trader does not use.
The second trade-off is the cost versus the platform. A low-cost broker may have a basic platform, and a high-cost broker may have a premium platform. The trader should test the platform with a demo account, and the trader should pick a broker whose platform matches the trader's style.
The third trade-off is the cost versus the research. A low-cost broker may have limited research, and a high-cost broker may have strong research. The trader who uses technical analysis can pick a low-cost broker, and the trader who uses fundamental analysis can pick a high-cost broker.
Common questions about low-cost brokers
What is the cheapest broker? The cheapest broker depends on the trader's volume and the trader's geography. The trader should compare the total cost, including the commission, the spread, the platform fee, the inactivity fee, and the currency conversion fee.
Are low-cost brokers safe? Yes, when the broker is regulated and when the broker segregates the client funds. The safety depends on the regulation and the broker's reputation, not on the discount model itself.
Can I switch from a high-cost broker to a low-cost broker? Yes, the trader can switch at any time. The trader can transfer the stocks in-kind to the new broker, and the trader can close the cash positions. The switch is a common practice, and the switch is a way to keep more of the returns.
Related resources
Where to start
If you are evaluating low-cost brokers, the most useful first step is to identify the cost drivers that are most relevant to your trading pattern, and to compare the total cost across three to five brokers. Our broker comparison lists the brokers and the fee schedules, which together tell you what the broker charges before you open the account.