Commission fees can take a large bite out of investment returns when buying and selling individual stocks, funds and other investment products.
Traditionally, these fees ranged from $1 to as much as $50. Fortunately, more online brokerages are moving toward a free stock trading model, which is good news for investors. In fact, Robinhood, an investment app, has offered zero-commission trading for years.
"Cutting commissions is definitely a step in the right direction in terms of reducing the costs for the investor," says Stan Gregor, CEO of Summit Financial in Parsippany, New Jersey.
In addition to free trades on stocks, some online brokers allow commission-free trading of exchange-traded funds -- these are funds that trade on an exchange like stocks.
Here are the seven best online brokerages for free trading services:
-- Charles Schwab (ticker: SCHW)
-- E-Trade (ETFC)
-- Merrill Edge
-- TD Ameritrade (AMTD)
-- M1 Finance
Charles Schwab (SCHW)
Charles Schwab is one of the more recent entrants into the free trades fray and it may be a good option for investors who are building a portfolio for the long term. The brokerage offers free online stock and ETF trading, along with many no-load, no-transaction-fee mutual funds. Options trading is offered for 65 cents per contract.
Patrick McDowell, research analyst and portfolio manager at Arbor Wealth Management in Miramar Beach, Florida says that Schwab takes the cake in terms of both pricing and function.
"They have the best combination of easy-to-use tech, banking and lending services and customer service," he says. "For the average investor, they are hands-down the best choice for a custodian."
Fidelity is an established name in online stock trading and it's one of the larger online brokerage firms to adopt a commission-free trade model. Fidelity's free trades apply to online U.S. equity trades, ETFs and options. The fee for options trades in a retail account is 65 cents per contract .
As of June 2019, the brokerage began offering more than 500 commission-free ETFs. This online broker also features a handful of zero expense fee index funds which may catch the eye of the cost-conscious investor, including the Fidelity Zero Total Market Index Fund ( FZROX), Fidelity Zero International Index Fund ( FZILX) and the Fidelity Zero Large Cap Index Fund ( FNILX).
Webull positions itself as a low-cost online brokerage, with no commission fees and free stock trading in its zero-commission brokerage account. Free trades apply to U.S. listed equities.
The platform's commission-free trading model is designed to remove the barrier to entry to the stock for investors who are not wealthy, says Anthony Denier, CEO of Webull Financial.
He says the platform may suit investors who are beyond the starter phase of investing but still have room to learn and prefer a hands-on approach versus a "set it and forget it" attitude.
Like other online brokerages, E-Trade free trades include U.S. stocks, options and ETFs. A contract fee of 65 cents applies to options trades, up to the first 29 trades per quarter. Once an investor reaches 30 trades per quarter, the options contract fee drops to 50 cents. Futures contracts trade at $1.50, with the fee increasing to $2.50 per contract for cryptocurrency products.
Overall, however, E-Trade offers a solid combination of investment variety, minimal fees and a highly maneuverable trading platform.
Merrill Edge Self-Directed trading features free stock trading for Bank of America Preferred Rewards members who prefer a DIY trading strategy. Unlimited free trades apply to online stock, ETF and options trades, with the standard 65-cent contract fee added on.
To qualify for Preferred Rewards membership, investors are required to have an eligible Bank of America personal checking account and maintain a three-month average combined balance of $20,000 between Merrill Investment accounts and/or Bank of America deposit accounts. Merrill Lynch Wealth Management clients who hold more than $250,000 in assets with Bank of America and Merrill are not eligible for Preferred Rewards.
An upside of this online brokerage account for the beginning investor is the initial zero dollar minimum investment requirement.
TD Ameritrade (AMTD)
After acquiring Scottrade in 2017, TD Ameritrade has emerged as one of the best online brokerages for free trades, with its investment mix and ease of use. There are no commissions to trade U.S. listed stocks, ETFs and options online. Investors pay a 65-cent contract fee for options that's in line with other online brokerages.
TD Ameritrade also offers access to hundreds of no transaction fee mutual funds as another opportunity to lower trading costs.
Blain Reinkensmeyer, head of research at StockBrokers.com, says that in his company's estimation, TD Ameritrade was already the number one broker overall before moving to free trades.
"At zero dollars per trade, the value proposition for customers is only stronger," he says.
Investors should note TD Ameritrade is being acquired by its brokerage rival Charles Schwab in an all-stock deal valued at $26 billion. The deal to combine the two firms is expected to close in the second half of 2020.
M1 Finance is a newer online brokerage that offers free trades and it may appeal to millennial investors who want a simplified way to build a stock portfolio. "M1 Finance isn't a traditional brokerage, but a broker-dealer," says Tess Wicks, founder of Wander Wealthy, a financial coaching platform.
Broker-dealers buy and sell securities on behalf of their customers. The platform charges no commissions or markups and features many exchange-listed securities to choose from.
One potential downside is the lack of mutual funds or options trading, which Wicks acknowledges may detract from M1 Finance's appeal. But she says those additional features may be overwhelming to newer investors who are diving into the stock market for the first time.
Leveraging Free Trades
While many of these brokerages offer free stock and ETF trades, they tend to be silent about extending zero trading fees to mutual funds.
Experts say the average investor may not save too much money by the changing landscape since most DIY investors don't trade a lot. But the new landscape may encourage better portfolio maintenance among ETF investors.
"While the industry has come out and made a major statement with commission-free trading, it's still important to understand what that actually means for you and your portfolio," Gregor says. "It does mean free for ETFs and equities, but not mutual funds, which are a major component of many portfolios."
In short, investors are wise to open a dialogue with their advisors to ensure they understand what they're paying and how trades fit into their long-term strategy.
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