Get to know your investment costs

All mutual funds have:

Expense ratios. This expense is measured as a percentage of the amount you have invested—for example, 1.25%.

You won't see it on your statement; it's deducted from your returns before they get to you. So, for example, your mutual fund might return 5%—but if your expense ratio is 1%, you'll only see a 4% return, meaning you'll lose one-fifth of your return right off the bat.

The money from the mutual fund expense ratio goes directly to the fund to pay management and administrative costs, which could vary widely depending on the fund and company.

Many fund companies, including Vanguard, offer shares that allow you to pay a lower expense ratio if you make a large investment. Check to make sure you're paying the lowest costs you qualify for.

See more about Vanguard fund share classes
 

Some mutual funds also have:

Purchase & redemption fees. Mutual funds may charge a percentage of the transaction amount every time you buy or sell. (Redemption fees usually only apply for a certain time period—for example, if you sell shares you've owned for less than 2 months.)

These fees go back to the fund to offset trading costs.

Loads. Loads are similar to purchase and redemption fees in that they're charged when you buy (front-end load) and sell (back-end load) certain securities. However, loads are paid directly to the investment company, not the fund.

12b-1 fees. These fees are charged to pay for expenses to market and distribute the fund.

Commissions. These costs are charged when you buy or sell securities. They go directly to the broker through which you buy your fund shares.

All ETFs (exchange-traded funds) have:

Expense ratios. This expense is measured as a percentage of the amount you have invested—for example, 0.50%.

You won't see it on your statement; it's deducted from your returns before they get to you. So, for example, the investments in your ETF might return 5%—but if your expense ratio is 1%, you'll only see a 4% return, meaning you'll lose one-fifth of your return right off the bat.

The money from the ETF expense ratio goes to the investment company to pay management and administrative costs, which could vary widely depending on the ETF and company.

Bid-ask spreads. This is another cost you won't see. It's the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

For example, let's say you want to buy shares of a certain ETF and you bid $20 per share. As soon as your bid is the highest in the marketplace, a seller accepts your bid and the sale is completed.

But now that your offer has been accepted, the new "highest bid" waiting to be filled is $19.95. On paper, you've already lost $0.05 per share.

In practice, the bid-ask spread isn't only an indirect cost, it's also a good measure of liquidity. For very liquid ETFs—those with many buyers and sellers at any given moment—the spread will stay very narrow. For ETFs that don't trade frequently, the spread can be much wider.
 

Some ETFs also have:

Commissions. These costs are charged when you buy or sell securities, and they go directly to the broker. While all ETFs technically have a commission fee, you may avoid it by buying the ETF directly from the provider.

All stocks have:

Bid-ask spreads. This is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

For example, let's say you want to buy shares of a certain stock and you bid $20 per share. As soon as your bid is the highest in the marketplace, a seller accepts your bid and the sale is completed.

But now that your offer has been accepted, the new "highest bid" waiting to be filled is $19.95. On paper, you've already lost $0.05 per share.

In practice, the bid-ask spread isn't only an indirect cost, it's also a good measure of liquidity. For very liquid stocks—those with many buyers and sellers at any given moment—the spread will stay very narrow. For stocks that don't trade frequently, the spread can be much wider.
 

Some stocks have:

Commissions. These are charged when you buy or sell stocks, and they go directly to the broker.

All bonds and CDs (certificates of deposit) have:

Bid-ask spreads (price spreads). This is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive.

For example, let's say you buy a certain bond for $990. If the current bid price for that bond is $970, you've already lost $20 on paper.

A bond's bid-ask spread will be partly due to how liquid the bond is. Less liquid corporate and municipal bonds can have wider spreads because the pool of potential buyers is smaller.
 

Some bonds and CDs have:

Commissions. For bonds and CDs, commissions can vary depending on whether you're buying on the primary market or secondary market, and they may be levied based on the face value or per transaction.

Commissions. For options, commissions are usually based on both a flat fee and a per-contract charge. An additional charge applies if you exercise the contract before expiration.

Bid-ask spreads. If you trade options (rather than either exercising them or letting them expire), you'll also be subject to a bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to receive for the option.

In practice, the bid-ask spread isn't only an indirect cost, it's also a good measure of liquidity. Options that have a lot of potential buyers and sellers should have a narrow spread. Options that don't trade frequently can have much wider spreads.