This week, a few major brokerage houses such as Charles Schwab and TD Ameritrade announced that they would reduce their commissions on online stocks and ETFs ) trade to zero.
It's not a whole new concept – Vanguard has been promoting free ETF trades for a while, while Fidelity offers index funds and zero-fee ETFs. And some of the newer online brokerage houses have built the business from the start with no trading commissions. Robinhood, for example, which launched in 2012, does not charge trading fees for its smartphone investment app.
However, many of the older brokerage houses make up a significant portion of the trading fee revenue. Until this week, Schwab charged customers $ 4.95 to trade US stock, ETF and option trades, reported the Wall Street Journal . (Options will cost $ 0.65 under the new fee structure.)
Is there no bad business operation to drop fees? It may seem like it's a catch. But in reality, these companies are trying to capture you as a customer. This does not mean that free trade should be avoided. But you should know where else you can pay to make up for it.
What You Should Know About Free Stock Trading Offers
These brokers mainly have a sale to withdraw, Nancy Marshall-Genzer, Senior Reporter at Marketplace, explained on Marketplace Morning Report . "They compete for individual investors who trade stocks and tend to shop around, and these brokers try to lure them in."
It's like a grocery store, the report explained: You go looking for one item that is on sale, and take a few other items at full price while you're there. "So they hope you open an account, maybe you sign in with one of their financial advisors, they can charge you a deposit fee to keep the assets in your account. But before they can charge you anything they have to get you in the door, "said Marshall-Genzer.
Before you start hunting without commission-free campaigns, you can check the brokerage's spending ratio . That is the percentage of investment you pay for the privilege of holding them in a particular fund. If you are more focused on sitting tight and watching your investments grow instead of making frequent trades, this is a more important amount to consider.
And remember that brokerage houses can always change pricing.