Commission

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Commission: Definition, Examples, and How It Differs from Fees

What is a commission?

A commission is a service charge a broker or investment advisor assesses for executing transactions or providing investment services. It is typically calculated as a percentage of the trade value or as a flat fee per transaction. Commissions are one way financial intermediaries earn revenue.

How commissions are charged

  • Charged on executed trades; some brokerages also charge when orders are modified, canceled, or partially filled (sometimes prorated).
  • May be a percentage of trade value (e.g., 2%) or a flat dollar amount (e.g., $4.95 per trade).
  • Can compose a meaningful portion of transaction costs and reduce net investment returns.

Example: how commissions affect returns

Suppose an investor buys 100 shares at $10 each:
* Purchase cost = $1,000
* Buy-side commission at 2.5% = $25
Six months later the shares rise 10% and are sold at $11:
* Sale proceeds = $1,100
* Sell-side commission at 2% = $22
Net profit before commissions = $100
Total commissions = $25 + $22 = $47
Net gain after commissions = $53

Commissions versus fees

  • Fee-based advisors charge a set amount or a percentage of assets under management (AUM) to manage money, regardless of which products are used.
  • Commission-based advisors earn money by selling specific investment products (mutual funds, annuities, insurance, etc.) and by trading client assets. This can create incentives to recommend higher-commission products or trade more frequently.
  • A fiduciary duty requires advisors to act in clients’ best interests; conflicts can arise when compensation depends on product sales.

Market trends and alternatives

  • Many online brokers now offer commission-free trading for stocks and ETFs. This has reduced direct transaction costs for many retail investors.
  • Discount brokerages and robo-advisors have grown in popularity. They typically provide low-cost access to stocks, ETFs, and index funds, and may charge either flat per-trade fees or an annual AUM fee (commonly around 0.25%–0.50%).
  • Even with commission-free trading, investors should consider other costs such as fund expense ratios, bid-ask spreads, and slippage.

How to protect yourself

  • Review the broker or advisor’s full fee schedule before opening an account.
  • Ask how the advisor is compensated: fee-only, fee-based, or commission-based.
  • Confirm whether the advisor is a fiduciary and how conflicts of interest are managed.
  • Consider the total cost of investing: commissions, advisory fees, fund expenses, and trading frequency.
  • Prefer low-cost, transparent investment products (index funds, ETFs) when appropriate.

Key takeaways

  • Commissions are transaction charges that reduce investment returns and can be a percentage or flat fee.
  • Commission-based compensation can create conflicts of interest; fee-based or fee-only arrangements reduce product-driven incentives.
  • Commission-free trading and low-cost robo-advisors have lowered transaction costs, but total cost of ownership still matters.
  • Always examine an advisor or broker’s compensation and fee schedule and prioritize fiduciary advice and transparency.