Trading and investing in stocks are some of the best and most effective ways of diversifying your financial portfolio. Investors spend most of their time choosing the right stocks and best trading platforms. However, one factor that most miss out on is the amount they lose through hidden charges.
Most traders advertise their services without explicitly mentioning how much it will cost to keep your trading account active. You’ll also come across advertisements with low commissions and think ‘zero-fee trading.’
However, underneath lie numerous hidden charges that most traders won’t tell you about. These fees can eat into your profits, and in some cases, hurt your investment plans. Below, we look at some common hidden charges your broker doesn’t tell you about.
§ Deposit and Withdrawal Charges
Moving money to and from your trading account will attract extra charges, which are often hidden in the broker’s fine print. Some brokers will charge a flat deposit fee and a percentage of the transaction amount for withdrawals.
Small investors feel the pain of these charges when depositing and removing funds from their accounts. For example, paying $25 USD to withdraw $500 USD translates to a 5% fee, which is astronomical. If you make multiple withdrawals per day or week, you end up losing a considerable amount on transaction fees alone.
Go for trading platforms like Weltrade, which offers free deposits and low-cost withdrawal options. Most traders these days accept free transfers via e-wallets like Payoneer or PayPal.
§ Penalties or Inactivity Fees
Some brokers charge penalties if you go without trading for a specific period. The goal behind this is to encourage investors to trade more. However, newbie traders are often caught off guard by this.
Brokers may ask you to pay a monthly fee to keep your account active until you start trading again. The charges will vary from broker to broker and between trading platforms. This can dent your investment plans if you trade occasionally or are still a beginner in the world of trading.
Over time, the inactivity fees will eat into your remaining balance. There are multiple ways to avoid paying penalties for not trading. The best way is to find a broker that doesn’t charge inactivity fees. If you cannot find one, try to trade once or twice a month to keep your account active.
§ The Façade of “Zero-Commission” Trading
Many investors have chosen a broker solely because they were advertising free trades. However, if you put two and two together, nothing is ever 100% free. Zero-commission trading is bait to catch unsuspecting traders who are still new in the game. The broker has to make some money, and they will do so by adding hidden charges.
One common trick most brokers use is widening the difference between the bid and the ask price, also known as the spread. This is common in forex trading, and in the long run, the broker will charge you extra without calling it commission fees.
Always compare brokers and analyze their total trading costs before using their services. Look at their spreads, especially if you are a high-volume trader.
§ Spread Markups
Brokers use this trick on newbie investors who aren’t conversant with spreads. Most brokers widen the spread to make a profit. However, they will not tell you about these spread markups upfront. Some may view it as a small difference, but it adds up over time, especially for investors who trade frequently.
One way to avoid this situation is by choosing brokers with tight spreads. Secondly, compare spreads across various trading platforms. Don’t be afraid to work with brokers offering variable spreads. These spreads can help you save money during high-liquidity periods.
§ Swap Rates
This happens if you trade on margin or hold positions overnight. Trading on margin means that you are borrowing money from your broker. The swap rate or overnight fee is the interest you pay for this loan. The fee isn’t fixed and varies depending on the market conditions, broker, and asset.
Holding positions for several days means they can add up quickly. If you are trading an asset with a high financing rate, the chances of paying more in fees are exponentially higher. In fact, the fees accrued could be more than the profit made over that period.
You can avoid this by evaluating the cost of holding positions overnight. Also, check your broker’s rate card for swap rates or overnight financing fees. For day traders, closing your positions before the market closes will help you avoid these charges.
§ Forex Conversion Fees
Conversion rates can be a real pain when trading assets using a currency that’s different from your account’s base currency. Picture this scenario: suppose you want to purchase a stock listed in USD, but your account in EUR. Your broker will convert your EUR to USD based on the current rates. However, it doesn’t end there. They will also add a small markup on the amount exchanged.
These fees can be a nuisance if you often trade on forex or international stocks. The 0.5-2% conversion fee can add up quickly, especially when you convert large sums frequently.
One simple way to avoid paying conversion fees is by looking for brokers offering multi-currency accounts. Some platforms allow investors to hold their funds in different currencies, reducing the need for regular conversions.
§ Platform Fees
Most trading platforms have an arsenal of advanced tools to help investors analyze the market and automate certain tasks. Some brokers charge platform fees for you to access these advanced features.
As always, new traders often fall victim in their quest to access a pro trading platform with advanced charting tools, algorithmic trading, and custom indicators. Do not be too quick to pay for premium tools if you are new to trading.
The best approach is to open a basic account and use it until you are comfortable. You can pay for pro features later as you gain more experience.
§ Final Thoughts
Hidden fees and charges are an unfortunate reality in the trading world. You can avoid most of what we have covered here by reading the fine print and comparing trading platforms before signing up.
Also, be patient. Start with a basic account and use it to hone your skills before going big on an account with premium features.
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