What is commission?
If you use an agent, such as a broker or investment adviser, to handle the buying or selling of a security on your behalf, you'll need to pay them. Often this payment will take the form of a commission – a fee calculated as a percentage of the transaction.
Where have you heard about commission?
If you've spoken to any investment adviser or broker, they will probably have mentioned their fee! If you're just looking for someone to take a look at your portfolio, or offer advice, it will likely be a one-off fee. If there are any transactions, expect commission.
What you need to know about commission...
Commission is calculated as a percentage of each transaction, and it can have a huge impact on an investor's returns.
If you buy some shares, for example, you may have to pay commission on that deal. If those shares appreciate in value, and you want to sell them on, there will be a separate commission charged on that second deal.
Say you buy 100 shares at £25 per share (£2,500). The broker charges a 2% fee, meaning your total cost is £2,550. You then want to sell these 100 shares at their new price of £40 (£4,000). Again, there is a 2% charge on the sale, meaning you receive £3,920.
So, despite there being a £1,500 difference between the total share prices, you only receive a profit of £1,370.
So always work out how much commission you'll be paying in total (for the buying and the selling) beforehand, because it could easily cut into your profits.
Commission costs vary widely. Some commission costs may be higher, but come with valuable advice, potentially increasing your chances of making a profit. Some costs may be lower, but come with no advice and could make your chances of making a profit much lower.
And remember, of course, that wherever you can make profit, you could make a loss instead.