Commissions

A commission is a cash payment made to a brokerage firm for executing a transaction. Brokerages charge commission fees in exchange for making trades for an investor.
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A commission is a cash payment made to a brokerage firm for executing a transaction. Commission prices are based on the type of security traded, the volume of securities traded or may be a flat fee for every transaction.

Commissions differ from management fees paid for mutual funds or ETFs. Management fees are typically charged as a percentage of assets invested or under management. For example, a management fee of 1% means $100 will be charged for every $10,000 invested in a fund or with a financial advisor.

Commissions, as well as management fees, have declined significantly from past levels, benefiting retail investors who historically had significantly higher trading costs.

Pricing Structures

Pricing structures for commissions may be tiered based on volume, fixed regardless of the volume traded, or free, depending on the brokerage account’s features. 

Per-ticket commissions are transaction-based commissions where a flat fee is charged per ticket regardless of the number of shares or contracts traded on the ticket.

Per-ticket pricing structures are common, especially for the volume typically traded in retail brokerage accounts. An example of a per-ticket commission structure is $5 per trade. Per-ticket commissions have been substantially reduced or eliminated for stock and ETF transactions. 

Per-contract commissions may be tiered or fixed depending on the volume of contracts traded during a month and are charged based on the number of contracts traded in a transaction.

For example, an iron condor consists of four separate options, so four contracts are traded per iron condor.

Per-contract commission may be tiered depending on the number of contracts traded, but monthly contract volume typically needs to be in the thousands for tiered pricing to be economical. 

Per-share commissions are volume-based, and the commission decreases as the volume of shares traded increases. Typically, a minimum commission of a nominal amount is charged per order, and a maximum per order commission is established, such as 1% of the total ticket value. The commission charged would vary based on the number of shares traded.

Per-share pricing structures benefit investors who trade a significant number of shares per month, often in the tens of thousands.

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FAQs

How are brokerage fees calculated?

Brokerage fees and commissions are payments made to a brokerage firm for executing a transaction. Brokerages charge commission fees in exchange for making trades for an investor.

Commission prices are based on the type of security traded, the volume of securities traded or may be a flat fee for every transaction.

Pricing structures for commissions may be tiered based on volume, fixed regardless of the volume traded, or free, depending on the features available within the brokerage account.

How do free brokers make money?

Full-service brokers make money through their services, such as investment advice and portfolio management. Brokerage firms may use uninvested cash from their customer’s accounts to lend money, invest, and generate interest.

Brokerages may also make money by intentionally routing orders to market makers who will reimburse the brokerage in exchange for the partnership.

Which online broker has the lowest fees?

Commissions, as well as management fees, have declined significantly from past levels, benefiting retail investors who historically had significantly higher trading costs. Brokerage fees are continuously changing and different brokerages have different pricing structures. However, most brokerage firms offer free commissions or minimal ticket charges for trades. 

Are brokerage commissions tax deductible?

Brokerage commissions are not tax-deductible. However, the cost of commissions and brokerage fees can be subtracted from taxable profits or added to taxable losses to accurately calculate the cost-basis of positions.

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