Impact of fees on stock purchases

When picking a bank for your stock account one of the most important aspects that you should pay attention to is the amount of fees that you have to pay when purchasing or selling stock. Estonian banks have different payment schemes for fees but in the end the majority of clients such as myself end up making LHV the home of their portfolio.

The reason for this is simple – LHV doesn’t have a monthly fee for “management” of your stock account. In most Estonian banks the fee is something like 0,8-2€, in some it goes up to almost 4€. This means an additional 12-60 euros that you have to earn yearly just to be even with the fees! Especially with a small portfolio this is highly unlikely to happen.

Fee model for puchases

The purchasing fees for LHV are quite straightforward. The cost of a deal is 3€+0,2% of the deal price. The flat fee means that the bigger your purchase the less you pay per 1€ spent.

For the LHV formula the cost per 1€ ends up looking like this:


You can see a lovely downwards curve that starts getting closer and closer to 0,2 cents per 1€ while never quite reaching it. This is why it’s important to think about how much stock you purchase at once. If you were to make a purchase that’s 250€, then the fee per 1€ would be 3 times higher than if you were to purchase 1000€ worth of stock.

To avoid fees making too big of an impact on your returns it’s reasonable to aim your purchases close to 750-1000€ because at that point the impact of the fees starts curving lower and lower. Of course it would be ideal to make purchases in the range of 10000€ to minimize the importance of fees but as a small scale investor it’s going to take a while to get to that point.

This also illustrates quite well why as a small scale investor you won’t be making much money quickly buying/selling stocks hoping to make money off that – the fees will just eat out any potential profits very quickly. For a dividend portfolio luckily fees are likely to be a one time thing since you’re buying to hold – and hopefully to never really sell. Any rebalancing should happen by buying into other stocks, which you would do periodically anyways.

12 thoughts on “Impact of fees on stock purchases

  1. Hi Kristi,
    I hope you had a great holiday!

    The banks can charge up to 4 Euros a month just for the trouble of ‘managing’ your stocks? That’s crazy, but at least there are low cost alternatives. 3 Euros + 0.2% for purchases doesn’t sound too bad though. Here in the US it’s a typical flat $7 fee for share purchases.

    How about mutual funds? Are there good selections of low cost index funds / ETFs or are they also expensive with high management fees? That can be a cheaper way to start investing, at least in the US since you can buy and sell fund shares commission free but there is a yearly percentage that is paid (typically 0.04% to 0.2% for a low cost index).

    Best wishes,

    1. My holidays were great, Estonia is currently having record temperatures, about two weeks already around 30-34 degrees Celsius! It’s getting a bit silly!

      Yes, banks charge a lot in Estonia and they make ridiculous profits because there isn’t that much competition here since we’re a small country. A lot of the mutual funds offered don’t really do well enough to justify buying them – most also have yearly fees in the range is 1-2%, which eats into profits way too much. No low fee index funds with easy access (such as Vanguard’s.) Buying SP500 is possible, but then you add currency risk, and the fee is something silly like 12€ per purchase, which is unreasonable for small time investors.

      1. ‘’ Yes, banks charge a lot in Estonia and they make ridiculous profits because there isn’t that much competition here since we’re a small country.’’

        They charge a lot but they don’t make ‘’ridiculous profits’’. For big banks we (small investors) are pain in the ass, more hassle than benefit (especially some years before, when all deals were made by phone). Problem, Baltic market’s population is too small and only small piece of it is actually investing/holding/trading securities and creating turnover for brokers. So to cover brokerage department expenses banks need to pump up fees.

        ‘’ No low fee index funds with easy access (such as Vanguard’s.) Buying SP500 is possible, but then you add currency risk, and the fee is something silly like 12€ per purchase which is unreasonable for small time investors.’’

        Well to invest in index fund (if you mean good old mutual index fund) you need some cash, so you are not anymore ‘’small’’ investor.
        If you are speaking about ETFs then it’s easy, just know the ticker and stock exchange. S&P500 and/or other Vanguard ETF products you can buy in EUR denominated currency if you are afraid from currency exposure. Vanguard ETFs in EUR currency you can buy in London Stock Exchange, some other cheap ETF providers like I-Shares S&P500 ETF, also denominated in EUR, in Frankfurt. Hell, you can even go all extravaganza and buy in CHF currency.

        I don’t know what do you mean by ‘’small time investors’’ but if they are speculators who are just buying and selling everytime index fund, then high commission fee is ok. Maybe it will teach them that index funds are not for trading.

        1. Let’s be realistic here, the banks are making ridiculous profits here in Estonia, even ordinary bank users have to pay ridiculous fees on every transaction (fees that people in Nordic countries for example don’t pay!). 1st half of the year 2014 for Swedbank – profits of 80,3 million euros. The bank managers literally complained on the news that they have too much money and nothing to do with it. (Seriously, whoever in PR department didn’t stop that statement from going out was probably fired.)

          I suppose I haven’t thought it out so much as to who a small scale investor is. I’d say I’m pretty far from starting to trade on international markets or being able to absorb the increased fees of international trade easily. I guess I’m a micro-scale investor then 😛

  2. You are speaking about everyday banking. I was only talking about brokerage department, as I said they are not making ridiculous profits from it. Take some bank’s financial report and look from where their profits come. Should one bank’s department (let’s say – loan) where are the huge profits coming to support other (e.g., brokerage) just because its low profitability and we-need-to-keep-fees-low? Retail brokerage is not an everyday product for Baltic people (ok, maybe Lithuanians are more trading securities) and banks can’t make big buck on it (yet) therefore also lowering your commission naturally without subsidizing it from somewhere else.

    1. True, overall I think the stock fees for trading (purchases) are fair enough in banks compared to other countries and I don’t expect subsidizing to happen from other departments.
      However, the monthly maintenance fees that some banks have for stock accounts I personally think are a bit ridiculous. (Same way as the monthly bank card “management” fee is silly in my opinion.)

  3. in case of bank card fee, i agree with you. But i have not found a way how to reduce it. Is there some bank in EE, which offers card for free?

    1. No, it seems they are very adamant on wanting the card “management” fee.
      I’d be surprised if anyone attempted to come out with a fee-free card, it would just be leaving money on the table for the banks.

  4. This bank also fits me the best:
    – management fee free stock account,
    – management fee free credit cards (with very simple rules),
    – free transactions;
    But, unfortunately, LHV still does not provide mortgage loans.

    1. I’m not sure whether their business strategy is focused on mortgages but I wouldn’t be surprised if they started offering them at some point because right now that’s keeping a lot of potential customers in other banks.

  5. Fees are the little devils that can destroy or severely impact total returns. A few dollars here and there don’t seem like much but when compounded over time those little fees add up to a lot. Like the latte factor with Starbucks. No one feels the impact of a coffee drink here and there but add the number of coffees you drink in a year and see how much real money is being flushed down the drain. Thanks for sharing.

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