In order to demonstrate the influence of brokerage commissions on the return on investment, I have compared the securities transaction commissions of three Baltic banks and two international brokers. The banks are Latvian, but the pattern holds anywhere: a local bank charges far more than an international broker. At the beginning, I summarized in the table the brokerage transaction commission used in this research for the purchase of shares, based on the data on the websites of these companies (January 25, 2024). As much as possible, I have simplified the price list information:
| Broker | Stock purchase in the US | Purchase of shares on the home exchange |
| Swedbank | 0.25%, min EUR 10 | 0 |
| Luminor | USD 0.015 per share, min USD 14 | 0.4%, min EUR 5.7 |
| SEB | 0.25%, min EUR 10 | 0.1%, min EUR 1 |
| Interactive Brokers | USD 0.0035 per share, min USD 0.35, max 1% | 0.05%, min EUR 1.25 and max EUR 29 |
| Lightyear | 0.1%, min USD 1 | does not offer |
For the sake of simplicity, let's assume that I buy shares of two companies from each broker - one company listed on the US stock exchange and one listed at home. I would then sell this investment after 1, 5 or 10 years, again applying the commissions of the paper transaction. Also, I assume that every year the share I bought would increase in value by 10%.
My first investment of EUR 100 is in the US listed company Coca-Cola. I have been lucky and managed to buy 2 shares exactly for the planned investment amount. I have summarized the commissions I paid to the brokers for this transaction and how they affect the total return on my investment in the following table:
| Commission, EUR | Return after 1 year | Payback after 5 years | Payback after 10 years | |
| Without commission | 0 | 10.0% | 61.1% | 159.4% |
| Swedbank | 10 | -9.1% | 37.3% | 126.7% |
| Luminor | 12.85 | -13.9% | 31.3% | 118.5% |
| SEB | 10 | -9.1% | 37.3% | 126.7% |
| Interactive Brokers | 0.32 | 9.3% | 60.2% | 158.2% |
| Lightyear | 1 | 7.9% | 58.5% | 155.8% |
The first conclusion that can be drawn is that the amount of commissions has a very large impact on the return if I sell the stock relatively soon after buying it. Thus, when selling after a year, my investment would have brought me losses at all three local banks as a result of the Coca-Cola brokerage commissions. Also, in the long term, share purchase commissions leave a very significant impression. The difference between the return on investment when buying a security from the most cost-effective broker (Interactive Brokers) versus the most expensive (Luminor) over a 10-year period is almost 30%.
What if, instead of Coca-Cola, I bought EUR 100 Virši-A shares, which are traded on the NASDAQ Baltic exchange (I would get 23 shares:
| Commission, EUR | Return after 1 year | Payback after 5 years | Payback after 10 years | |
| Without commission | 0 | 10.0% | 61.1% | 159.4% |
| Swedbank | 0 | 10.0% | 61.1% | 159.4% |
| Luminor | 5.7 | -1.3% | 47.0% | 140.0% |
| SEB | 1 | 7.9% | 58.5% | 155.8% |
| Interactive Brokers | 1.25 | 7.4% | 57.8% | 154.9% |
| Lightyear | does not offer |
In the next step, I want to demonstrate how the previously made observations would change if I made share purchase transactions for a larger amount - EUR 1,000. In such a situation, the impact of commissions on the return on investment would be as follows:
| Commission, EUR | Return after 1 year | Payback after 5 years | Payback after 10 years | |
| Without commission | 0 | 10.0% | 61.1% | 159.4% |
| Swedbank | 10 | 7.9% | 59.5% | 156.8% |
| Luminor | 12.85 | 7.3% | 59.0% | 156.1% |
| SEB | 10 | 7.9% | 59.5% | 156.8% |
| Interactive Brokers | 0.32 | 9.9% | 61.0% | 159.3% |
| Lightyear | 1 | 9.8% | 60.9% | 159.1% |
Now, the cost of brokerage commissions no longer has such a significant impact on the return on investment, especially in the longer term. It can be concluded that if relatively larger amounts are invested and in the long term, more attention can be paid to other aspects of choosing a broker and less concern about acquisition commissions.
However, it should be noted that there are a number of other costs associated with securities transactions that may be imposed by the broker. One of them is the monthly fee for servicing the securities account, which for an investment portfolio of EUR 1,000 would vary from 0 to EUR 2 per month. To receive dividends from US companies, a broker may require you to complete and submit a W-8BEN form. For some brokers (for example Lightyear) this service is free, but for example Luminor it costs EUR 30 (in addition, this form must be renewed regularly). Additional commissions are also hidden in currency conversion costs (local banks usually have higher prices than international brokers). It is also worth considering that each broker may offer different interest on the balance of money in the account. For example, among the reviewed brokers, Lightyear offers the highest rate for the euro account balance - 3.25% per year.
In summary, stock buying and selling commissions can have a significant impact on investment returns when purchases are made in relatively small amounts or over a real period. Here it is important to remember that good stock investment diversification starts with investing in 20 different companies. Therefore, if you plan to invest amounts in each transaction of around EUR 100, carefully study the commissions of brokers. On the other hand, if you make share purchases in the amount of EUR 1000 or more, you can pay more attention to other advantages of the broker.
However, it should be noted that there are a number of other costs associated with securities transactions that may be imposed by the broker. One of them is the monthly fee for servicing the securities account, which for an investment portfolio of EUR 1,000 would vary from 0 to EUR 2 per month. To receive dividends from US companies, a broker may require you to complete and submit a W-8BEN form. For some brokers (for example Lightyear) this service is free, but for example Luminor it costs EUR 30 (in addition, this form must be renewed regularly). Additional commissions are also hidden in currency conversion costs (local banks usually have higher prices than international brokers). It is also worth considering that each broker may offer different interest on the balance of money in the account. For example, among the reviewed brokers, Lightyear offers the highest rate for the euro account balance - 3.25% per year.
In summary, stock buying and selling commissions can have a significant impact on investment returns when purchases are made in relatively small amounts or over a real period. Here it is important to remember that good stock investment diversification starts with investing in 20 different companies. Therefore, if you plan to invest amounts in each transaction of around EUR 100, carefully study the commissions of brokers. On the other hand, if you make share purchases in the amount of EUR 1000 or more, you can pay more attention to other advantages of the broker.