When we talk about commision, we see that the word is everywhere. It is essentially a service charge that is assessed by an investment advisor or a broker to handle sales and purchases or for providing investment advice. Everything is done for the client.
There are a few important differences between both fees and commisions as to how both the words are used to describe the advisors in the financial services industry. A commodity based broker or advisor can only make money by selling products dealing with investment like annuities, mutual funds and by conducting monetary transactions with the client’s own money.
This can be either in dollars or a percentage of AUM (Assests under Management). Sales between the members if the family are usually not commission based because they are gifts of equity.
It is important to note that a fee based advisor will charge you a flat rate on the Best Trading Platform in India for taking care of and managing the client’s money while a advisor who works on a commision basis makes his money by conducting transactions and selling investment products.
Understanding how the commission system works.
A full service brokerage services much of their profit from charging people commsions well as getting them from client transactions. Commsions differentiate heavily from each btokerage. Each of them have their own fee schedule for numerous services.
Commissions are charged if say an order is modified, cancelled or even it is expires or is filed. In most of the situations out there, when an investor puts through a matket order that doesn’t go as planned or is unfulfilled then no commision is charged on that. Incase the same order is modified or cancelled, extra charges are added to the commission. Orders that are based on limit that often go partially filled will most of the times incur a small fee, sometimes just on prorated basis.
Cost on commision
Commissions are such that they eat heavily into the returns of an investor. Say person A buys a 100 shares of a big company for ten follsrd each. On that her broker charges a 2.5 percent commision on of 2.5 percent. Person A then pays a thousand dollars for her total shared and then another 25 dollars for the commission. Six months after that person A’s shares have appreciated by say 10 percent and she goes out to sell them. The broker has a charge of two percent commision on the sale or a sum of twenty two dollars. Just like this, person A’s investment has given her a profit of hundred dollars but she gave out a sum of forty seven dollars in the two transactions on simple commissions. Therefore her net gain comes down to only fifty three dollars.
For this simple reason, so many robo advisots and online discount brokerage firms are gaining mass popularity now. These services provide a good amount of access to index funds, stocks, exchange trade funds and on a better user friendly platform for all the self directed investors out there.