Some Brokers Are Canceling Trading Fees – What’s the Catch?
Several major brokerage firms, such as Charles Schwab and TD Ameritrade, announced this week that they will slash their commissions on online stock and ETF (Exchange Traded Funds) trading to zero.
It’s not exactly a new concept – Vanguard has promoted free ETF trading for a while, while Fidelity offers zero-commission index funds and ETFs. And some of the newest online brokers have built their businesses from the start with no trading fees. For example, Robinhood, launched in 2012, does not charge trading fees for its smartphone investing app.
But many older brokerage firms derive a significant portion of their income from trading commissions. For example, prior to this week, Schwab charged clients $ 4.95 for trades in US stocks, ETFs and options, according to the Wall Street Journal . (Options trading will cost 65 cents with the new commission structure).
Isn’t cutting commissions a bad business move? It may seem like there is a catch here. But in reality, these firms are just trying to catch you as a buyer. This does not mean that commission-free transactions should be avoided. But you need to know where else you can pay to compensate for this.
What You Should Know About Free Stock Trading Offers
“These brokers are essentially selling to get you,” explained Nancy Marshall-Gänzer, Senior Marketplace Reporter for Marketplace Morning Report . “They are competing for individual investors who trade stocks and tend to shop around, and these brokers are trying to lure them in.”
Her report explains that it’s like a grocery store: you go looking for one item that is for sale, and you grab several other items at full price while you’re there. “So they are hoping that you open an account, maybe you sign up with one of their financial advisors, they might charge you a fee to hold assets in your account. But before they can indict you, they have to push you through the door, ”said Marshall-Gänzer.
Before you start chasing commission-free promotions, check the broker’s expense ratio . This is the percentage of your investment that you pay for the right to keep it in a certain fund. If you are more focused on sitting and watching your investments grow rather than making frequent trades, this is a more important amount to consider.
And remember, brokerage houses can always change their pricing schemes.