The short version
- Visible charges such as commissions are only part of the bill; spreads, currency conversion and fund charges are often larger.
- Percentage costs charged every year compound against you, so a fund charge of 1% can cost far more over decades than it sounds.
- Add up the total cost for your own pattern of investing before choosing a broker or a fund.
Trading fees explained properly means looking past the headline. A broker's price list shows the charges it wants you to compare; many of the costs that shape your long-term return are built into prices and exchange rates, or taken inside a fund where you never see a bill. Here is each one in turn, with illustrative numbers you can check.
The spread: the cost inside every price
Every market quotes a price to buy (the ask) and a lower price to sell (the bid). If you buy and then sell straight away, you lose the difference. As an illustration, a share quoted at $99.95 to sell and $100.05 to buy has a spread of $0.10. Buying 100 shares and selling them immediately at those prices loses 100 × $0.10 = $10, before any commission.
Spreads are narrow on large, heavily traded shares and ETFs, and wider on small companies, overseas markets outside their main hours, and in fast-moving conditions. Using a limit order stops you paying more than you intended, though it cannot make the spread disappear.
Commissions and dealing charges
The most visible cost is the dealing charge: a flat fee per trade, a percentage of the trade value, or a per-share amount. "Commission-free" brokers still earn money through spreads, currency conversion, interest on uninvested cash or, in some markets, payments for routing orders to particular market makers. None of these are wrong in themselves, but they mean "free" describes the price list, not your total cost.
Currency conversion: the fee hidden in the rate
When you buy shares priced in another currency, the broker converts your money. The fee is often added to the exchange rate as a percentage. On a £10,000 purchase, a 0.5% conversion fee costs £50, while 1.5% costs £150, and the fee is charged again when you sell and on each dividend that is converted. For regular overseas investors this can be the largest single cost. Our forex guide explains why exchange rates also move your returns directly.
Fund charges: small numbers, long shadows
Funds and ETFs take an ongoing charge, often called the expense ratio, as a yearly percentage of what you hold. It is deducted inside the fund, so you only see it in a slightly lower return. Over a long period it compounds.
With a 0.1% yearly charge (5.9% net): $10,000 × 1.05925 ≈ $41,918
With a 1.0% yearly charge (5.0% net): $10,000 × 1.0525 ≈ $33,864
Difference: about $8,054
The investments inside both funds could be identical. The only difference is the fee, and it takes roughly a fifth of the lower-cost result. Real returns vary each year, but the direction of the effect does not.
Taxes and duties on trades
Some countries tax share purchases directly. In the UK, buying most UK shares electronically incurs Stamp Duty Reserve Tax of 0.5% of the purchase price, so an illustrative £5,000 purchase carries £25 of tax. Some purchases are exempt, including most foreign shares bought outside the UK and units in many funds. Separately, dividends from overseas shares may have tax withheld at source before they reach you, and capital gains and dividend taxes depend on where you live and the type of account you use.
Account, custody and inactivity fees
- Platform or custody fees: a yearly percentage or flat fee for holding investments with the broker.
- Inactivity fees: charged if you do not trade or log in for a set period, which particularly affects patient investors.
- Transfer and closure fees: charged when you move holdings to another firm.
- Extras: paper statements, telephone dealing, real-time data subscriptions.
Costs on leveraged and crypto products
Leveraged products such as CFDs add an overnight financing charge for each night a position stays open, which quietly erodes positions held for weeks or months. Crypto platforms charge trading fees on each side of a trade, and moving coins off a platform costs a network fee plus any withdrawal fee the platform adds. Our crypto profit calculator shows the effect of a percentage fee on both the purchase and the sale.
Trading fees explained in one number: your total cost
- Write down a typical year: how much you will invest, how many trades, which currencies and which funds.
- For each broker you are considering, total the dealing charges, conversion fees, account fees and any taxes for that year.
- Add the weighted ongoing charges of the funds you plan to hold.
- Express the total as a percentage of your portfolio. Compare that number, not the advertised headline.
Dealing charges: 12 × £5 = £60
Platform fee at 0.25%: £20,000 × 0.25% = £50
Fund ongoing charges at 0.2%: £20,000 × 0.2% = £40
Total: £150, or 0.75% of the portfolio
In this example, fixed dealing charges are the biggest single item, which suggests fewer, larger purchases or a regular-investment plan with lower charges might help. On a larger portfolio the percentage fees would dominate instead. Doing the sum for your own numbers shows where the money actually goes.
The cost of cash and waiting
Money sitting uninvested in a brokerage account may earn little or no interest, and some brokers keep part of the interest earned on client cash. Holding some cash is sensible, but large balances left idle for long periods have a cost too, both in lost interest and in lost investment returns. Check what your broker pays on cash, and whether it moves cash into a money market fund or leaves it in a low-interest account.
Our broker checklist covers the non-cost checks that should come first.
Reader questions
What is the biggest hidden cost for long-term investors?
For many, it is the yearly charge on funds and platforms, because it is taken every year on the whole balance and compounds. For investors buying overseas shares often, currency conversion fees can be just as large.
Are ETFs cheaper than other funds?
Many ETFs have low ongoing charges, but not all. Some traditional index funds are just as cheap, and trading ETFs adds spreads and possibly dealing charges. Compare the full cost for the way you invest.
Do I pay stamp duty on US shares bought from the UK?
UK Stamp Duty Reserve Tax generally applies to UK shares, not to most foreign shares bought outside the UK. Other charges, such as currency conversion and any US withholding tax on dividends, can still apply.
Sources
- HM Revenue & Customs, Tax when you buy shares (Stamp Duty Reserve Tax)
- UK Financial Conduct Authority, rules on cost and charges disclosure