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.
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