A few weeks ago I received a question from a beginner investor in our community that wanted to know what kind of costs or fees to expect when investing.
The truth of the matter is that it will mostly depend on the type of platform or service you decide to go with.
In this quick and straight to the point post I will elaborate on the main costs you should expect when you start your investing journey. I break it all down by type of investing tool or service.
This is by no means a comprehensive list of everything available out there so if I missed something feel free to share in the comments!
And here we go …
Online Brokerages Accounts
These types of accounts allow you to invest on your own and allow you to have FULL control over what stocks or investments you buy or sell.
When you open an online brokerage account and fund it with your own money the only main fees you will be responsible for are:
- Transaction Fees: How much the online broker will charge you to buy and sell stocks/funds.
- Capital Gains Taxes: When you invest and make a profit from your investment, the IRS will take its cut from those profits. You also pay taxes when you get dividend payments from companies.
The average transaction fees for most online brokerage accounts range from $4.95 to $9.99 per trade – this is regardless of how many shares you buy or sell at once.
Using the $4.95 example, that means that whenever you want to buy stock in a company (again, regardless of how many shares) you pay $4.95. When you sell, you pay the same single fee again. And that’s about it.
When it comes to taxes, the short story is that Uncle Sam will tax you at 15% or less if you hold your stocks for longer than one year (considered ‘long term’). If you hold your stocks for a year or less (‘short term’) it will tax you 20% or more. Capital gains taxes depend on two things: 1. How long your held your shares 2. Your tax bracket.
NOTE – If you’d like more information about capital gains taxes let me know in the comments and I’ll write a full post about this!
Examples of online brokers include: TDAmeritrade, Ally Invest (formerly Tradeking), E*Trade, Scottrade, Fidelity, Sharebuilder, and the list goes on.
Applications (“Investing Apps”)
Most investing apps trending today are completely free when it comes to investing fees. Also, some apps will allow you to invest on your own (just like online brokers) while others will invest for you.
In both cases, if there are no investing fees involved and you are investing with your own money, the only costs you’d have to consider are capital gains taxes if you sell stocks at a profit. You would get a statement at the end of the year that you would take to your tax accountant.
One thing to keep in mind in the case of apps that invest on your behalf, is that you don’t have any direct control in terms of where your money is being invested in. The app would allocate your money towards funds that match your risk tolerance – whether you are conservative or have a high tolerance for risk. They would decide how to allocate your money by asking you a series of questions when you first sign up. You have to leave it up to the app to decide where your money goes.
Examples of apps include: Robinhood, Acorns, Stash.
Robo-Advisors are online platforms that use technology, algorithms, and automation to allocate your money in investments best suited for your personal financial goals. Whether that money will be used for retirement, a college fund, buying a house in 10 years (or anything in between) – a robo advisor will determine where your money should be sitting (and growing) for a designated time period. The system will make adjustments to your portfolio sporadically to make sure you are on track to meet your originally designated goals.
The two major costs involved include management fees and account minimums. Just like online brokerage accounts, the fees and minimums will depend on the company you choose and can go from free/no minimum up to minimums of $50,000 and management fees of 0.89% per year (sometimes more). It will all depend on the company you decide to go with.
Examples of Robo-Advisors include: Betterment, Wealthfront, Ellevest.
Full-Service brokers “do it all”, as the name indicates, and are frequently used by high net worth individuals. These brokers are “real” people, often Certified Financial Advisors or Chartered Financial Analysts that work at a money management firm and often require that you have hundreds of thousands of dollars to invest in order to offer their services.
Fees can be upwards of $140 or more per transaction not to mention that many take a percentage of your assets every year regardless of whether or not you make money. All fees involved will ultimately depend on your service agreement with that particular broker or financial institution.
Don’t have any specific example of full service brokers but you can find most of these people at wealth management banks or institutions that offer these kinds of services.
Remember that all fees are in addition to taxes, of course, because no one is going to pay your taxes for you :).
My Personal Approach
If you have followed me for a while, you know I am a strong believer (and VERY passionate) about do-it-yourself investing and for that reason I personally use an online brokerage account to invest and have been doing so for almost a decade.
With that said, I also understand that many people may not have the passion, the interest, or the time to invest on their own, and so, there are options for those individuals who want to be more “hands of”.
At the end of the day I would tell you to explore your options and go with what you feel works best for you and your personal situation.
By the way – if you come across an app, website, and/or type of investing service I didn’t get to include in this post (there are so many options!), feel free to let me know in the comments and and I can help answer any questions you may have about that particular service.
TELL ME – If you currently invest, what kind of platform do you use? If you don’t invest as of yet, which one do you think you’d be more comfortable with?
cheers to an amazing week!
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