Summary: There are a number of stock market fees that any investor - big or small - needs to take into consideration when buying and selling listed securities. This page discusses the full range of stock market transaction costs.
It is worth noting that fees are different in amount and sometimes form from country to country, but dealing on the stock market without paying some form of transaction fee is not currently possible. To be sure of your own situation, it is worth investigating dealing fees in your own country.
Firstly, let us look at the types of assets. The costs detailed on this page will relate to direct ownership in stocks (shares in the UK), collective investment schemes (mutual funds or unit trusts) and hedge funds (just because they are different and slightly alarming!). The costs are different for each type of asset, but there are also some common fees to all. So we shall look at those as well.
Fees Common To All Assets
Capital Gains Tax is your governments portion of any profit that is made on the sale of assets. This profit is calculated after deducting the purchase price of the asset, any costs associated with buying and selling and - sometimes - other professional fees involved with the transaction.
Most types of assets can be taxed on a capital gain - property and land, antiques, coins, company shares, stamps and many other things besides. Taxation is paid by the individual as part of an annual return.
Most nations have some form of zero rate band or capital gains tax free allowance - usually annually. There are reasons for this, and an important one is the complexity of calculating small gains is often not worth the effort of checking and collecting the tax money!
This means that for many - if not most investors - their likely rate of CGT is zero. However, depending upon the location of the residence of the reader, this may range as high as fifty percent.
There are some nations that do not charge capital gains tax on the sale of assets. These countries often become semi-tax havens for wealthy individuals from neighbouring countries that need to sell major assets - perhaps the sale of a personally owned business for example. An example of such a country is Belgium.
Other countries, such as the more well known 'tax havens' charge zero rates of capital gains tax to make them an 'asset haven'. The names of these countries are much more familiar and are mostly small island nations in sunny locations such as the Caribbean.
The rates applicable to an investor depend upon many factors, but personal situation is the major influence. It is therefore important that every reader obtains personal advice from a locally qualified professional. Tax evasion - even if accidental - is not usually something a government is inclined to take lightly.
In many nations, capital gains tax is either waived or deferred in certain collective investment funds. These funds are usually targeted at retirement planning and the special low tax enviroment is designed to act as a carrot to encourage people to plan and save for their retirement. This will hopefully reduce the overall responsibility on the state.
Stamp duty is another government charged fee that is usually applied to all transactions. When in the transaction it is applied may change from nation to nation, but usually stamp duty is applied at purchase. Normally, the professional involved in the transaction (lawyer or stockbroker) will collect the correct fee on behalf of the government.
There are many nations that do not charge any form of stamp duty, but most countries that have had some previous relationship with the United Kingdom (normally Commonwealth nations) do impose such a tax.
The history of stamp duty relates to the use of a wax stamp or seal to provide authenticity for a document. The stamp from a local lawyer or representative of the King was enough to prove a document was real. Of course, the official charged for the service and so the custom continues to this day...
Withholding Tax is a fee levied on asset ownership and transactions - again charged by government - that relates to foreign asset holdings. Most countries charge some form of withholding tax on their residents. This is a relatively complex area of finance and we recommend research into the specific situation of the reader if any substantial assets are held in other countries. This potentially includes residential property and businesses as well as stock market listed assets.
Dividend income from holdings abroad that has had the withholding tax waived or pre-paid is often known as franked income. The wide range of tax treaties between major nations means that this is another potential tax nightmare! Be sure to seek individual advice relating to your situation.
Fees Charged On Direct Stock Market Holdings
Dealing Fees are generally otherwise known as stockbroker commission. This is split into two parts. Firstly, there is a 'bid/offer spread' which provides some profit on the transaction. The size of the 'spread' relates to the liquidity of the company in question. In other words, bigger firms have more buyers and sellers, which attracts more competition from other brokerages. That competition helps to drive down margins.
This spread is usually in the region of 1%, but in small companies with limited supply and demand for holdings, it can be as high as 5%.
In the United States, this used to be conducted in eigths and sixteenths, but since turning decimal, brokerage margins have been slashed.
Stockbrokerages also charge a fee to deal in the stocks. This may be either a set fee, for example $10 or £10, or it may be a percentage of the overall value of the purchase. Usually, a brokerage will charge a low set fee to attract the mass-buying public, but then charge a percentage on the bigger purchases over a pre-set limit.
These percentage fees depend in part on competition in the market. In the golden days of stockbroking, they were perhaps as high as 1% of the transaction, but 0.4 - 0.6% is more normal now. Of course, this - again - depends upon where you are and the local market.
If a brokerage is offering a 'higher' level of service, either advisory management or discretionary management there will also be an annual management fee. This fee is deductable against any capital gains that are made and is normally charged on the amount (monetary value) of the portfolio. A figure in the region of 1% to 1.5% to possibly even 2% each year is to be expected. It goes without saying that a higher fee should be represented by a higher level of service.
In the modern world, such fees are now mainly used by wealth
managers and private client services firms. The most famous of these
could be Swiss banks and their fund management arms, but there are so
many wealthy individuals that most major banks and financial services
companies will have some sort of wealth management division.
At the top of this page, it was mentioned that we would explain some of the fees in a hedge fund. This section is not to help the average private investor. Your author has been able to meet a number of hedge fund managers and promoters over the years and the main thing learnt from these meetings is that a hedge fund is not for average investors!
In fact, your author likes to think of himself as reasonably 'savvy' when it comes to the ways of the stock markets, but hedge funds are another step beyond. Many have proprietary trading strategies - meaning they won't tell you what they do. Others will tell you, but it is so complex you will understand barely a word. Others still will tell you, you will understand some of it - enough to realise that it is so high-risk that the strategy terrifies you!
To quote a well known industry phrase, hedge funds are not for 'widows and orphans'...
The fee structure of a hedge fund is usually similar to that of any other collective investment fund (an annual management fee for example). Fees are usually higher and an annual management charge (AMC) will be around 2% or possibly even 2.5% per year.
However, there will be some form of 'performance fee'. This fee is to reward the fund manager for his (or her) excellent results. This fee will usually be paid for outperformance (a return over and above a pre-set number) and will be between 20% and 25% of the outperformance. Yes! 20% of the gain will go to the managers. These will be the highest stock market fees that an investor will pay.
This can, and often has, reached tens of millions of dollars per year for each individual in the fund management team! This is the 'market rate' for their talent.
To read more about stock market transactions and stockbrokers, please follow these links: