How High Is A Normal Stockbroker Commission?Most stockbroker commission is made by being in the middle of a trade. They charge a 'bid offer spread' which is a technical way of saying that they make their money in the middle. 'The spread' can vary in size. Generally speaking, the more shares traded every day in a company, the more brokers there will be that deal in them. As more stockbrokers deal in an issue, competition is raised and therefore prices fall. The firms with the highest liquidity are those at the top of an index. In the UK for example, firms like BP, Vodafone, Lloyds TSB, Barclays Bank and Shell will have many brokers dealing in their stock and literally milions of shares will change ownership on every trading day. For an individual to deal in these companies, the costs, the bid offer spread, will be very low and generally in the region of only perhaps two percent. At the other end of the scale, there are very small companies which have a listing, but have a small market capitalisation. These companies may not necessarily trade on the main exchange and as such, there is very little action and few trades. Therefore, not many stockbrokers will be dealing in their shares. Reduced liquidity and minimal competition from other brokers means that the spread in these smaller firms will be much higher. It is usually advised that spreads can be up to seven percent, but I have heard of one unlucky friend who once traded with a spread of nine percentage points. This is an expensive way to do business! Most stockbrokers cannot reasonably expect their commission to be this high. The 'offer price' is quoted to people who wish to purchase whilst the 'bid price' is quoted to those planning to sell. I have always remembered which is which by using the little rhyme: bid to get rid. In other words, the bid price to sell. Whilst most investors do all they can to reduce the level of stockbroker commission that they pay, it is worth remembering that without stockbrokers, we simply could not trade the major (or minor) markets of the world. It is also worth noting that the role just described may partly be carried out by 'market makers', though this depends on the particular stock exchange. Other pages related to this topic are:
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