As with anything you buy, there are fees and costs associated with investing too. These fees may seem small, but over time they can have a major impact on your investment.
Investment fees are one of the most important determinants of investment performance and something every investor should focus on. Although you earn a good gross return, your net return will be reduced by the amount of fees you pay. The higher the fees, the lower the return you actually receive.
There are certain types of investment products that inherently carry high fees. Generally speaking, the more theoretical an asset class, the higher the fees you will pay. For instance, mutual funds generally carry higher fees. You should obtain information about all the fees you are charged and why they are charged. Ask your broker-dealer to explain the fees if you do not understand them.
Type of fees
Fees typically come in two types: transaction fees and ongoing fees.
Transaction fees are charged each time you enter into a transaction, for example, when you buy a share or mutual fund. Transaction fees are charged at the time you buy, sell or exchange an investment. As with any fee, transaction fees will reduce the overall amount of your investment. With all the brokerage firms available, most of their charges on buying equity on the Ghana stock exchange is around 2.5% per transaction. GSE, SEC, development fee and brokers commission make up the total cost per transaction.
Commissions. You will likely pay a commission when you buy or sell a stock through a financial professional. The commission compensates the financial professional and his or her firm when it is acting as agent for you in your securities transaction.
Markups. When a broker/dealer sells you securities out of its inventory, the broker/dealer acts as a principal in the transaction. When acting in a principal capacity, the broker/dealer generally will be compensated by selling the security to you at a price that is higher than the market price (the difference is called a markup), or by buying the security from you at a price that is lower than the market price (the difference is called a markdown).
Sales loads. Some mutual funds charge a fee called a sales load. Sales loads serve a similar purpose to commissions by compensating the financial professional for selling the mutual fund to you. Sales loads can be front-end, in that they are assessed at the time you make your investment. One investment bank I know charges 1% for every deposit made into mutual funds. Back-end are charged if you sell the mutual fund, usually within a specified timeframe.
Surrender charges. Early withdrawal from an investment will usually result in a surrender charge. Most of these fees are high at the earlier dates and lower when the investment is nearing maturity. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years.
Ongoing fees or expenses are charges you incur regularly, such as an annual account maintenance fee. Ongoing fees can also reduce the value of your investment portfolio. This is particularly true over time, because not only is your investment balance reduced by the fee, but you also lose any return you would have earned on that fee. Over time, even ongoing fees that are small can have a big impact on your investment.
Investment advisory fees. If you use an investment adviser to manage your investment, your adviser may charge you an ongoing annual fee based on the value of your portfolio.
Annual operating expenses. Mutual funds and ETFs, are essentially investment products created and managed by investment professionals. The management and marketing of these investment products result in expenses and costs that are often passed on to the investor in the form of fees deducted from the fund. These annual ongoing fees can include management fees and other expenses. These fees are often identified as a percentage of the fund’s assets.
Along with the other factors you think about when choosing either a financial professional or a particular investment, be sure you understand and compare the fees you’ll be charged. It could save you a lot of money in the long run.
By Kenneth Adu