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November 10, 2006

How to Reclaim Hidden Stock Trading Fees

posted by MR WAVETHEORY at 11/10/2006 05:57:00 AM

Every broker assesses fees for various services. Some of these services are legitimate. Examples include: getting stock certificates, charging you for margin, getting duplicate copy of statements. However, there are also other fees that I would consider to be "hidden fees." One hidden fee that I just learned about is called the late settlement fee.

So, what is this late settlement fee? Late settlement occurs when you buy or sell a stock and payment or securities are not received and booked into your account by 4 p.m. Eastern time on the settlement date of your trade. Say for instance, you have $1000 in your account and you buy $2000 worth of stock. This is perfectly reasonable if you use 50% margin. Margin just means you borrow 50% of the amount you purchased. So, in this case, you buy $2000 of stock by using your $1000 plus borrowing $1000. So, how come there is a fee? Unscrupulous brokers can choose to book the trade as a cash trade which means they will count your purchase as a $2000 cash trade instead of a $2000 margin trade. Guess what? You don't have $2000 in your account. And then the hidden fees start kicking in.

Notice how the broker has full discretion on how they book the trade? And how insidious it is? The broker has allowed you to purchase $2000 of stock as a cash trade when you only have $1000 in cash - knowing full well that it needs to be booked as a margin trade or else it would be in violation of Regulation T (ie you didn't have enough purchasing power to do it). That is why it is a hidden fee.
Brokers can make alot of money on this type of hidden fee particularly on active accounts.

Unsuspecting customers don't even notice what happens because customers rarely check their papers statements anymore. However, if you are an investor with any brokerage including the big ones like Fidelity, The Charles Schwab Corporation (NYSE SCH), E*Trade Financial Corporation (NYSE ET), and TD Ameritrade Holding Corp. (Nasdaq AMTD), check your statements. Don't believe for a single second that just because you invest through a broker that buy glossy advertisements in expensive magazines that you have an honest broker. Yours truly recently discovered this the hard way.

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