The Big Idea
Commissions are the fees brokers charge for executing your trades. For most of stock trading history, commissions were a significant cost — sometimes $5, $10, or even $50+ per trade. In late 2019, most major US brokers eliminated stock and ETF commissions, ushering in the “commission-free” era for retail trading. But “commission-free” is misleading. Brokers still need to make money, and they do — through other costs that are often less visible. Understanding what commissions are, where they still apply, and how brokers monetize “free” trading is essential to actually understanding what your trades cost you.
Think of commissions like the visible price tag on a product. Decades ago, you walked into a store and the price was clearly marked: “Buy 100 shares = $25 commission.” You knew exactly what you were paying. Today, “commission-free” is more like a buffet that’s “free” — but the building, the food, and the staff still cost money. The buffet is paying for it through other revenue streams (entry fees, drinks, the location’s rent built into something else). When commissions disappear from the visible price tag, the costs don’t disappear — they just become less visible. And less visible costs are usually larger than visible ones, because there’s less pressure on the broker to keep them low.
For active traders, commission structures matter enormously. A 0.5% commission cost on a 1% gain doesn’t sound bad — until you realize it’s 50% of your profit. Multiply across hundreds of trades per year and commissions can swallow your edge entirely. Commission-free trading was genuinely revolutionary for occasional retail traders. For active traders, the picture is more complex because the alternative cost structures sometimes work out worse than honest commissions would.
How Commissions Work
Traditional commission models charge a fee per trade, calculated in different ways:
Per-Trade Commission
A flat fee regardless of trade size. Common for retail brokers: $0, $1, $5, $10 per trade. You pay the same whether you trade 1 share or 10,000 shares.
Per-Share Commission
A fee per share, usually with a minimum. Common at active trader brokers: $0.005 per share, with $1 minimum. 1,000 shares = $5 commission. Better for small trades, worse for large trades than flat fees.
Tiered Commission
Different rates based on volume. Higher monthly volume earns lower per-trade rates. Designed to reward active traders.
Percentage Commission
Common in international markets and crypto. A percentage of trade value, like 0.1% or 0.25%. Heavily favors small traders over large.
Per-Contract (Options/Futures)
Options and futures still charge per-contract commissions even when stocks are commission-free. Common: $0.65 per options contract.
Combined Models
Some brokers combine commission types — a flat fee plus per-share, or commission plus regulatory fees, etc.
What “Commission-Free” Really Means
When major brokers like Schwab, TD Ameritrade, and Fidelity went commission-free in late 2019 (following Robinhood’s example), they didn’t stop earning money. The revenue model shifted to:
Payment for Order Flow (PFOF)
Brokers route customer orders to high-frequency trading firms in exchange for payments. The HFT firm executes the trade and pays the broker. This is the largest revenue source for many “commission-free” brokers. We cover this in detail in our PFOF explainer.
Wider Spreads
The execution prices you receive may be slightly worse than you’d get with direct market access. The difference between the price you’d ideally get and the price you actually get is the implicit cost.
Cash Sweep Programs
Idle cash in your account earns a low interest rate (sometimes 0%) while the broker invests it elsewhere at higher rates. The spread is broker profit.
Margin Interest
Margin loans charge substantial interest — often 7-12% annually. For brokers, lending margin is highly profitable.
Securities Lending
Brokers lend out customer-held shares to short sellers, earning fees. Customers in some account types receive a fraction of these earnings; in others, the broker keeps it all.
Premium Services
Advanced platforms, market data, research, and other features may be sold separately or as part of premium account tiers.
Where Commissions Still Apply
Even at “commission-free” brokers, commissions remain on:
Options Contracts
Most brokers charge $0.65 per options contract. A 10-contract trade = $6.50 commission. Multi-leg strategies multiply commission costs.
Futures Trading
Per-contract commissions, often $0.85-$2.25 per contract per side. Round-trip costs can be significant for active futures traders.
Mutual Funds
Some mutual funds carry transaction fees ($25-$75) at brokers, especially for funds outside the broker’s “no-transaction-fee” list.
Bonds
Bond trades typically have markups built into the price plus possible explicit commissions. Less transparent than stock trading.
International Stocks
Trades on foreign exchanges often carry commissions. ADRs (US-listed foreign companies) are usually commission-free.
OTC and Penny Stocks
Some brokers charge commissions on stocks under $1, OTC pink sheets, and similar low-quality securities.
Crypto (Varies)
Some brokers (Robinhood, Webull) offer “commission-free” crypto but build costs into the spread. Dedicated crypto exchanges typically charge 0.1-0.5% fees explicitly.
Forex
ECN forex brokers charge commissions ($3-$10 per standard lot round trip). Market Maker forex brokers don’t but build costs into wider spreads.
Commission Math: Real Trading Cost
Understanding total cost requires calculating what you actually pay, including hidden costs.
Example 1: Stock Trade at “Free” Broker
You buy 100 shares of XYZ at $50 displayed price. The actual best market price might have been $49.998 — but PFOF execution gives you $50. The difference: $0.20.
Visible commission: $0
Hidden cost (price improvement lost): $0.20
Total trade cost: $0.20
Far better than the old $5-10 commissions. For occasional retail traders, “free” really is much cheaper.
Example 2: Active Trader Comparison
An active trader makes 500 stock trades per year, averaging 200 shares per trade.
“Free” broker with PFOF: estimated $0.001 per share lost to PFOF execution = 200 × $0.001 = $0.20 per trade × 500 = $100/year hidden cost.
Direct access broker with $0.005/share commission: 200 × $0.005 = $1 per trade × 500 = $500/year visible cost.
“Free” broker wins on cost here. PFOF execution quality might be slightly worse, but the cost differential is real.
Example 3: Options Trader
An options trader makes 100 trades per year averaging 5 contracts each.
Standard commission $0.65/contract: 5 × $0.65 = $3.25 per trade × 100 = $325/year
Plus exchange fees, regulatory fees: maybe another $50-100/year
Options trading remains commission-bearing. For active options traders, broker selection based on per-contract pricing matters.
The Hidden Cost: Slippage and Execution Quality
Even commission-free trades have implicit costs through execution quality.
Price Improvement vs Execution Cost
The “national best bid and offer” (NBBO) is the best displayed buy/sell prices across all exchanges. Quality execution should match or beat NBBO. Lower-quality execution gives you slightly worse prices.
Spread Capture
Market makers earn the spread between bid and ask. PFOF brokers route to market makers who capture some of this spread. Some of that spread cost is passed back to you through slightly worse fills.
Reporting Statistics
Brokers must report execution quality statistics quarterly. These show price improvement rates, average effective spreads, and execution speed. Look for these reports if you want to evaluate true execution costs.
The Bottom Line
“Commission-free” stock trading is genuinely cheaper than the old paid model for most retail traders. But “free” doesn’t mean costless. The implicit costs are real, even if smaller than the explicit commissions used to be.
Commissions for Active Traders
Active traders must do detailed cost math because commissions can dominate profitability.
Commission as Percentage of Profit
If you earn $100 on a trade and pay $20 in commissions, you keep $80 — commissions ate 20% of your profit. Across many trades, this adds up dramatically.
Trade Frequency Impact
10 trades/month × $1 commission = $120/year. 10 trades/day × $1 commission = $2,500/year. Same per-trade cost, vastly different annual cost.
Position Size Impact
A $1 commission on a $100 trade is 1%. The same $1 on a $10,000 trade is 0.01%. Larger positions amortize commission costs better.
Strategy Sensitivity
Scalping strategies aiming for 0.1-0.5% gains per trade are extremely commission-sensitive. Swing trading aiming for 5-10% gains can absorb commissions easily.
Commission Optimization for Active Traders
- Choose broker structures matching your trade size
- Negotiate volume discounts at active trader brokers
- Consolidate positions to reduce trade count
- Avoid splitting orders across multiple small trades
- Account for commissions in profit projections
Commission Differences by Asset Class
| Asset Class | Typical Commission Status |
|---|---|
| US Stocks | $0 at major brokers |
| ETFs | $0 at major brokers |
| Options | $0.65 per contract typical |
| Futures | $0.85-$2.25 per contract |
| Forex (ECN) | $3-$10 per standard lot |
| Forex (Market Maker) | Built into spread |
| Crypto | 0.1-0.5% typical, varies wildly |
| Bonds | Markup-based, varies |
| Mutual Funds | $0-$75 depending on fund |
| International Stocks | $5-$50+ depending on market |
Examples of Commission Impact
Example 1 — Sarah’s Long-Term Strategy
Sarah is a buy-and-hold investor. She makes 12 trades per year — one per month buying ETFs. Average trade size: $1,000.
At her commission-free broker, her total annual commission cost is $0. Even with PFOF inefficiency, her hidden cost is maybe $5-10 per year. Negligible.
Commission elimination was a huge win for traders like Sarah. The old $7-10 per trade × 12 trades/year = $84-120 in commissions ate noticeable amounts on a smaller portfolio.
Example 2 — Jake’s Active Day Trading
Jake day trades stocks, making about 20 trades per day. Average position: 200 shares of $50 stocks ($10,000 per trade).
At his commission-free broker, visible commission is $0. But execution quality matters. If PFOF execution is $0.002/share worse than NBBO, his hidden cost is 200 × $0.002 = $0.40 per trade × 20 trades = $8/day = ~$2,000/year.
If he switched to a direct-access broker charging $0.005/share but with better execution, he’d pay 200 × $0.005 = $1.00 per trade visible × 20 = $20/day = ~$5,000/year.
For Jake, commission-free is actually cheaper. But the math depends on execution quality differences which are sometimes hard to measure precisely.
Example 3 — Maya’s Options Trading
Maya trades options, averaging 5 trades per week with 5 contracts each.
Annual commission cost: 5 × $0.65 × 5 = $16.25 per trade × 250 = $4,062/year
Plus exchange fees: another ~$500-1,000/year
Maya’s commission costs are substantial. She analyzes whether to negotiate volume discounts, switch to a flat-fee options broker, or consolidate strategies to reduce trade count.
For her, commission-free era didn’t help much — options remain commission-bearing. Broker selection for options is more cost-sensitive than for stocks.
Common Mistakes
- Believing “free” means costless. All brokers profit somehow; the costs just shifted location.
- Not comparing options/futures commissions. Where commissions still exist, broker selection matters greatly.
- Ignoring per-share vs flat structures. Wrong structure for your trade size dramatically increases costs.
- Trading too frequently. Even small commissions add up across hundreds of trades.
- Splitting orders unnecessarily. Each order incurs separate commission costs.
- Forgetting regulatory fees. SEC and FINRA fees add small amounts to all trades.
- Choosing on commissions only. Execution quality, platform reliability matter too.
- Not negotiating at active broker level. Active traders often qualify for volume-based discounts.
- Wrong account type. Some account types have different commission structures.
- Crypto fee blindness. Crypto exchange fees are high but often not displayed prominently.
The Big Picture
Commissions remain an important consideration even in the “commission-free” era.
Here’s what to remember:
- “Commission-free” means no visible commission, not no cost
- Brokers still profit through PFOF, spreads, margin, and other channels
- Stock and ETF commissions are largely gone at major US brokers
- Options, futures, forex, and crypto still have commissions
- Hidden execution costs matter for active traders
- Per-share vs flat-fee structures affect different trade sizes differently
- Active traders should calculate full annual commission costs
- Commission-free is genuinely cheaper for most retail traders
- Match commission structure to your trading frequency and size
- Don’t choose brokers solely on commissions
The shift to commission-free trading was genuinely good for retail traders. The visible costs disappeared, lowering barriers to participation and making smaller-account trading viable. For most people, the new model is unambiguously better than the old paid-commission world.
However, “free” carries hidden costs. Broker monetization shifted to PFOF (which we explore separately), spread costs, and margin lending. These are usually still cheaper than old commissions, but they’re real costs that aren’t always visible.
For active traders, the math gets more complex. Frequency multiplies any cost — small differences become large annual costs. Active traders should calculate total annual costs across visible commissions and hidden execution costs to make informed broker choices.
For options and futures traders, commissions remain a major cost factor. Per-contract commissions of $0.65 might sound small but multiply quickly across multi-leg strategies and frequent trading.
The simple advice: pay attention to costs even when they look like zero. Read your broker’s execution quality reports. Calculate your total annual costs. Match broker selection to your specific trading style and frequency. Don’t assume “commission-free” means costless, but also don’t assume commissions are necessarily bad — sometimes paying explicit commissions for better execution is the cheaper total cost.
The forex equivalent of this whole discussion: spread vs commission structures, where ECN brokers charge commissions plus tight spreads while STP brokers charge no commissions but wider spreads. The principles are the same — visible vs hidden costs, with total cost being what matters.
Trading costs remain real even when they’re invisible. Smart traders track them anyway.
Related Terms
- What Is Payment for Order Flow? — Major revenue source for “free” brokers
- What Is Spread? — Implicit cost on every trade
- What Is Slippage? — Execution quality matters
- What Is Order Routing? — How brokers send your orders
- Forex Broker Types — Different commission models
← Back to the Complete Trading Terms Glossary
Focus on the process. Trust the stats. Stay consistent.