Do you know how much your investments cost? It might be more than you think.
You often incur costs when you buy, own, and sell an investment. Here are four types of costs you should be aware of:
- Transaction Fee. Many brokerage accounts charge a transaction fee each time an order to buy or sell a mutual fund or stock is placed. There are many types of brokerage fees that can be charged based on a percentage of the transaction or a flat fee, or a combination of both.
- Sales Commission or Load Fees. These fees are paid to an agent or broker upon a purchase or sale. The cost is incurred when you either buy or sell shares – it depends on the type of mutual fund you choose. A front-end loaded fund charges you a fee when you buy shares of that fund, and a back-end loaded fund charges a fee when you sell the shares.
- Expense Ratio. Many investments have an ongoing, annual charge called an expense ratio, which pays the manager of a fund. An account with management fees usually has two primary types of fees: the annual fee charged for the management of the portfolio and the fees associated with the underlying investments in the portfolio.
- 12b-1 Fee. Some funds include additional 12b-1 marketing fees on top of the expense ratio, which pay the brokerage firm that holds the fund. These fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund’s investors.
These fees and expenses can vary widely, even on very similar investments. By reviewing your investments and replacing loaded, high-expense funds with lower cost alternatives, you can keep more money in your own pockets.