It refers to the transaction charge paid to a broker for a securities trade. The fee can be a fixed one or a percentage of the trade amount.
An investor should consider the commission charged for various services provided by a broker or a fund manager.
Brokers portray themselves as fee-based rather than commission-based, as fee-based involves charging a flat rate whether the sale has been made or not. However, in commission-based, it implies that the broker wants to make the sale for his personal interest compromising the client’s interests and needs.
For many brokers and financial advisors, a major chunk of their income comes from charging commissions from clients, investors as well as fund houses.
Returns on investment might be eroded by commissions. Let’s say A spends Rs. 1000 for buying 100 shares of Rs. 10 each of company XYZ. A pays Rs. 2,000 for the shares plus Rs. 25 because her broker charges a 2.5% commission on the transaction.
Six months later, shares are appreciated by 10% and A sells them. His broker charges a 2% commission on the sale, or Rs. 22. A’s investment earned him an Rs. 100 profit, but he paid Rs. 47 in commissions on the two transactions. His net gain is only Rs. 53.