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Best Online Brokers for Low Commissions

| MoneyRates.com Senior Financial Analyst, CFA
min read
In a tough market, adopting cost-conscious investment strategies can be a key to success. Out of 18 brokerage firms surveyed, MoneyRates found 13 that offer a $0 flat rate commission.

 

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Discount stock brokers that don't charge trading commissions give you a great opportunity to eliminate a significant source of investment cost.

When the stock market is booming, it's easy to overlook commission costs. They just don't seem that big a deal when your stocks are up 20%.

However, when you get into more of a sideways market - or worse, a bear market - it becomes especially important not to let costs cut into your investment returns. If eliminating trading commissions can improve those returns, why not take that step?

This article shows how you can cut commission costs by explaining common questions like:

  • How do commissions work?
  • How can I invest without paying a fee?
  • What are the best brokerage accounts for low stock commissions?
  • What else should I consider when choosing a broker?

Eliminating commissions can be a cost-saving step for any investor. For investors who trade frequently, though, it could be especially important since they stand to benefit the most.

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How Stock Trading Commissions Have Changed

For decades, it wasn't unusual for trading costs to represent 1% of the value of a trade. And this was a cost you'd pay twice - once when buying a stock and then again when selling it.

Considering that the average historical return on large cap stocks has been a little under 10% per year, giving up a total of 2% on every stock you buy and sell would take a significant chunk out of your return.

Things started to get better in the 1980s and 1990s; but more recently, a price war among online brokers has completely changed the commission landscape.

At first, falling trading costs mostly benefited larger investors. Now, the little guy is getting more of a break.

As online brokers became prominent, the way commissions worked changed from being based on a certain number of cents per share to a flat rate per trade.

A flat rate meant that, instead of the commission varying according to the size of the trade, you'd pay the same price for every trade. Again, that's mainly a benefit for large investors, since those flat rates would represent a smaller percentage of bigger trades.

Since several discount brokers have taken the next step by charging no commissions, today's trading environment is much friendlier to smaller investors too.

How Much Are Trading Commissions Today?

So how much should you expect to pay for stock trades today?

To answer that question, MoneyRates.com surveyed 18 prominent discount brokers. The average flat-rate commission among those 18 firms was $1.54 per trade.

By way of contrast, just four years ago when MoneyRates.com first did this study, the average flat-rate commission was $8.29 per trade.

Even the steep drop in average commission from $8.29 to $1.54 doesn't tell the full story of how trading costs have come down.

In that initial survey four years ago, no brokers offered a $0 flat-rate commission. By late last year, half did.

Now, 13 out of 18 brokerage firms surveyed offer a $0 flat rate commission. In other words, today it is not only possible to avoid paying trading commissions, it has become the norm.

How Do You Invest in Stocks Without Paying Commissions?

Even though $0 commissions are the new normal, investing in stocks without paying commissions is not automatic. You have to choose the right brokerage account.

First, do your research. Compare commission schedules for different brokers before choosing one.

Also, be advised that many brokerage firms offer different types of accounts. So, even within a given brokerage firm, commission rates may vary.

For example, if you want to work with a human financial advisor for investment or financial planning advice, you won't get that from a zero commission brokerage account.

Also, zero commission accounts may restrict your access to tools or investment products.

However, if you plan on making your own investment decisions and can work with a more limited range of options, a $0 commission brokerage account could be the most cost-effective approach for you.

The Best Brokerage Accounts for Zero Commissions

If you want the cost-effective trading available from a zero commission brokerage account, here are some options for you:

Whereas this survey found no $0 commission accounts just four years ago, now there are several such options. All of the brokerages listed above have accounts that offer $0 commissions on routine stock trades.

This shows that the brokerage industry is changing quickly, and commission policies are subject to change at any time. So, be sure to check the latest details before you sign up with a brokerage firm.

In any case, the above list would be an excellent place to start when it's time to shop for an online broker.

Do $0 Commissions Mean Trading is Free?

As attractive as zero commission trading platforms are, they don't completely eliminate the cost of trading.

A key concept that impacts the cost of stock trades is the bid-ask spread.

Stock exchanges are marketplaces where some people are selling stocks and some are buying them. A trade takes place when a buyer and a seller can agree on a price.

In effect, though, there is some negotiation first. Sellers have an asking price while buyers bid what they are willing to pay.

On average, those bids are a little less than the asking price. This creates what's known as a bid-ask spread.

Bid-ask spread example:

Say a stock last traded at a price of $30.50. There might be buyers bidding $30.49 for the stock, and sellers asking $30.51.

Buyers and sellers don't always meet in the middle. Depending on how many buyers there are relative to the number of sellers, or on how eager one side or the other is to complete a trade, the price of a stock transaction may be closer to the bid price or the ask price.

Smaller investors who lack the buying power and access to sophisticated trading resources of institutional investors often have to accept a price on the opposite side of the spread. That is, they pay full asking price on buys and accept the bid price on sales.

The portion of the spread that is given up when trading is a cost. In fact, brokerage firms often make money from this bid-ask spread at the expense of their customers.

On top of the bid-ask spread, some trades incur regulatory fees. Like the bid-ask spread, these fees are often just pennies per share.

As small as these other costs sound, they can add up for active traders. While the elimination of commissions on many brokerage accounts has greatly reduced the cost of trading, it still is not completely cost-free.

What Other Costs Should You Watch Out For?

Besides commissions, there may be other costs associated with a brokerage account.

Here are some examples of the type of fees brokers may charge:

  • Maintenance fees

    These are monthly or annual fees charged just for having an account. While most of the brokerage accounts surveyed do not charge these fees, you should be aware that they exist so you can try to avoid them.

  • Paper statement fees

    Online accounts offer the convenience of allowing you to access your information online at any time. However, if you want to receive paper copies of your account statements, it is likely to cost you an additional fee.

  • Inactivity fees

    Some brokers charge a fee if your account fails to meet a required level of trading activity.

  • Wire transfer fees

    These are charged if you want to wire money from the account to another party or an outside account.

  • Security transfer fees

    Transferring securities into and out of a portfolio is likely to incur a fee, which may vary according to the type of security. As a rule of thumb, it is cheaper to transfer cash than securities.

Brokerage account fee schedules can be lengthy, but it is important to look at them before choosing a broker. It helps if you can think through how you intend to use the account, so you can figure out which fees would apply to you.

Other Considerations in Choosing a Stock Broker

Keeping costs down is an important way to enhance your investment returns, but it's not the only thing to think about when choosing a broker.

Other things that may be important to you include:

  • Range of product offerings
  • Research resources
  • Trading simulators and portfolio management tools
  • Ease of use/functionality of the trading interface

Fortunately, as the number of zero commission accounts has increased, your choices have grown. You can now pick from several commission-free accounts to find the set of other features that suits you best.

Learn more about online brokers

What How You Trade Says About You as an Investor

In the scheme of things, how much weight should you put on cost in choosing a broker?

That depends somewhat on how you invest.

Fundamental investors of the Warren Buffett type tend to invest according to the long-term business prospects of a company. As a result, these investors tend to take large positions and hold them for a long time. Trading costs take less of a toll on this type of investor because they trade less frequently.

However, if you are a day trader, momentum player or technical investor, you are likely to invest in a much higher volume of short-term positions. This makes trading costs more of a factor.

No matter what type of investor you are, keeping costs down is a common-sense step you can easily take. The more actively you trade, the higher a priority this should be.

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