Your first steps into investing may feel a bit like buying your favourite football shirt online.
A tempting offer catches your eye, and you click through to order the replica. Then delivery fees, sleeve patches, personalisation and printing costs all pop up at checkout… and your final bill is far from the original price!
Investing can be just as frustrating if you don’t know what to expect.
Many will understandably put all their effort into working out what funds or shares they’d like to buy: for example, a FTSE-100 tracker fund, a technology ETF or even a share in Manchester United (one of several football clubs listed on a stock market).
But do this, and you risk overlooking something that can be just as important to long-term success: the cost of buying, holding, and selling your investments.
At first glance, those charges might look tiny, but over the years - and decades - they can end up taking a big bite out of your returns.
And while investors can’t control whether markets rise or fall, you can control many of the fees you pay via your choice of platform or broker. Look out for investment fees and charges, and you’ll be better placed to spot good value and make sure more of your money stays on the pitch working for you.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
Key summary of fees:
- Platform costs: How you’ll be charged for your investment account.
- Dealing fees: What you’ll pay to buy and sell.
- Fund manager fees: Check for inbuilt costs if you want to pick funds.
- The 1% factor: How small percentages can potentially add up over the years.
1. Platform charges: an investment account
Before you can buy shares or funds, you need an investment account. This is usually provided by an investment platform, broker or app.
Think of it like registering your squad for the Premier League season. Even before a ball is kicked, you’ve got set-up costs to take into account.
Most investment platforms charge either:
- A flat monthly fee
- A percentage of your portfolio value
Flat fees are straightforward - you simply pay the same sum each month. For example, you might pay £5 or £10 a month to use the platform, whether your account holds £500 or £5,000.
Percentage fees work differently. These can typically range from around 0.15% to 0.45% a year. So if you had £10,000 invested and your platform charged 0.25%, you would pay £25 per year.
Some platforms may cap this percentage charge, e.g. you won’t pay more than £350 a year regardless of the size of your investment.
Or they may reduce the percentage size they charge you, according to how much you have invested. For example, you might typically pay a fee of 0.25% up to £10,000, 0.2% on anything between £10,001 and £25,000, and 0.15% on anything above this.
If you’re starting out in investing, percentage pricing can be cheaper because the costs to you will usually be small. However, as your investments grow in value, so too do those charges.
For example:
- £10,000 invested at a 0.25% fee = £25 a year
- £100,000 invested at the same fee = £250 a year
This extra cost is often behind an investor’s decision to switch from a percentage fee to a flat fee, once their portfolio reaches a certain size.
It is also important to check for any extra platform charges too. Some providers might include a fee when you eventually transfer your money out, or if there’s no activity on your account for a long period.
2. Dealing fees: The price of buying and selling
Whenever you buy or sell an investment, your platform executes a trade on the market. To do this for you, it usually charges a dealing fee, also known as a commission.
Historically, brokers charged fixed dealing fees, often £10 or more per trade. Today, the explosion of investing apps has shaken up the investment market to make it much cheaper for investors.
Many apps now offer ‘zero commission’ to attract customers who want to trade shares or funds, but look out for other fees they may have.
These can include:
- Foreign exchange (FX) charges on overseas shares
- Wider ‘bid-offer’ spreads (where a platform typically keeps more of the difference between what it pays to buy or sell the same share/fund for you)
- Interest earned on any cash balance you may keep in the account
FX fees are particularly important if you’ve considered an investment in US shares. Providers may typically charge around 0.5% to 1% every time your pounds are converted into dollars or vice versa.
Now this may not sound like much, but it can quickly add up if you plan to buy and sell shares regularly. Imagine paying an extra 1% every time your football club bought or sold a player. Over a few transfer windows, the costs would start to soar.
If you’re a beginner thinking of investing monthly, platforms offering free (or low-cost) regular investing can help keep your fees down.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
3. Fund expenses: a hidden cost to compare
If you’re looking for a platform to invest in funds e.g. trackers or exchange-traded funds (ETFs), instead of individual shares, keep an eye out for a separate layer of fees.
Every fund charges an annual management fee to run it, usually listed as either the:
- OCF (Ongoing Charges Figure)
- TER (Total Expense Ratio)
It’s deducted automatically inside the fund - so you never physically see the money go out of your account - but it ultimately means less money back to you as an investor.
As a general rule, so-called ‘passive’ tracker funds tend to be the cheapest option.
These simply track or follow an index like the FTSE 100 or S&P 500 using computer systems rather than expensive human managers. Fees can be very low, often between 0.05% and 0.15% a year.
Active funds are different. Here, professionals try to beat the stock market by picking winning investments. And because this usually requires research teams, analysts, and lots of trading, the costs tend to be much higher - often between 0.75% and 1.25% (or more).
However, many active funds fail to consistently beat cheaper passive funds after fees are deducted. It’s not unlike football managers on very generous salaries promising Champions League football only to finish fifteenth in the league… expensive does not always mean better!
Exchange Traded Funds tend to be a lot cheaper than active funds, often with fees matching those of tracker funds, but compare to see how their costs stack up.
Whichever type of fund you decide to invest in, always read the fund factsheet to check for any other charges, e.g. any trading or hedging fees.
The 1% factor. How small fees can add up to big costs
A 1% fee sounds so insignificant, you could be forgiven for barely noticing it. But investing happens over decades, and that changes everything.
Every pound you lose to charges isn’t just money gone today; it’s future growth lost forever - it’s money that could otherwise have grown in value and earned its own returns.
It means that, over a 20 or 30-year period, the difference between a 0.25% fee and a 1.5% fee could potentially cost you thousands of pounds in lost returns.
Now, very few people open an investing app thrilled at the idea of comparing platform charging structures.
But understanding costs is one of the most powerful advantages you can have as a beginner investor.
While low fees do not guarantee success, high fees also don’t automatically mean failure. Yet as a principle, if all else is equal, the less money you hand over in charges, the more remains invested for your future.
In football, fans celebrate spectacular goals and superstar signings. But titles are often won through organisation, discipline, and avoiding unnecessarily costly mistakes. It’s often said that investing works much the same way.
Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.
Your capital is at risk. The value of investments can go down as well as up. Past performance is not an indicator of future results. This content is for informational purposes only and does not constitute financial advice.