A transaction fee charged by a broker.

What Is a Commission?

A commission is a service charge assessed by a broker or investment advisor for providing investment advice or handling purchases and sales of securities for a client.

There are essential differences between commissions and fees, at least in how these words describe professional advisors in the financial services industry. A commission-based advisor or broker makes money by selling investment products such as mutual funds and annuities and conducting transactions with the client's money.

A fee-based advisor charges a flat rate for managing a client's money. This may be either a dollar amount or a percentage of assets under management (AUM). Sales between family members are often gifts of equity, which are not commission-based.

Understanding Commissions

Full-service brokerages derive much of their profit from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage, and each has its fee schedule for various services. When determining the gains and losses from selling a stock, it's essential to factor in the cost of commissions to be completely accurate.

Commissions can be charged if an order is filled, canceled, or modified, even if it expires. In most situations, when an investor places a market order that goes unfilled, no commission is charged. However, if the order is canceled or modified, the investor may find extra charges added to the commission. Limit orders that go partially filled often will incur a fee, sometimes on a prorated basis.

Today, most online brokers no longer charge commission for buying and selling stocks.