A transaction fee is a fee charged by a brokerage firm for every trade that takes place. These fees can range from $0 to $9.95, depending on the firm.
Why It's Important
Transaction fees are significant because anytime you make a buy or sell trade in your account, you're charged that fee. So, let's say you need to sell out of investments and invest in something different. You will have to pay that fee not once but twice for each investment. Let's say the fee is $4.95 per transaction; you would have to pay $9.90 per investment to sell then subsequently buy a new security. Multiply that by how many investments you are trying to get rid of, and it could be quite expensive. I have seen situations where an investor paid hundreds of dollars just in fees to get out of bad investments!
Transaction fees are becoming a little less important because most of the brokerage firms have moved to $0 fees this year. Among the firms that have made the change are Ally Invest, Charles Schwab, TD Ameritrade, and Fidelity. Of course, Robinhood has always been $0 fees since they started. With that said, there are plenty of options out there, and I don't think anyone needs to be charged a transaction fee unless you choose to go through an institution.
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