With every passing day, trading is becoming more inclusive. The lure of easy and big money prompts more and more American investors into opening trading accounts and jumping on the trading bandwagon.
The credit for this largely goes to the US brokers, who are regularly devising creative ways to draw more customers and outsmart other brokers.
Be it free stock suggestions or Algo trading, app-based services, or exclusive offerings; US brokers are always ready with innovative ways to woo investors and traders.
Broking firms like Alpaca have taken this one step further by making free stock trading a reality. But is free stock trading as simple as it sounds? Probably, yes.
Let us find out what trading for free means and whether you should consider it. The following sub-sections will clarify all your doubts related to free stock trading and give you time-tested tips to maximize your profits.
Is Trading for Free Real?
Yes, it is 100% genuine and real, only if you choose the right broker.
The US stock market has several brokers who claim to offer 100 percent free stock trading, but not all actually offer such a facility.
There have been instances when broking firms exited at the same speed in which they entered the market. And, if, unfortunately, you were a client of any of those brokers, the chances are high that you lost most of your unused funds.
So, which is the best way to find a broker whom you can trust? Read on to find out.
Types of Brokers
In the US, brokers are of three types – full-service brokers, discount brokers, and commission-free brokers.
Full-service brokers provide premium stock tips and are usually good for people who do not understand anything about stocks and yet want to make money from the markets. They charge three types of fees – account maintenance fees, transaction fees (can be around $50 per trade), and inactivity fees.
Before opening your account with a full-service broker, try to evaluate their past performance and service quality.
Discount brokers, on the other hand, charge minimal account maintenance charges and offers a per-transaction fee of an average $10. However, for every extra feature that you avail of, you have to pay extra.
Before opening an account with a discount broker, find out what type of charges they levy on extra facilities. Sometimes, the extra charges are quite high, which also makes this option relatively expensive.
Commission-free broking firms have revolutionized the field of stock trading by offering the facility to trade for free.
Earlier, traders had to pay a fixed fee irrespective of whether the trade went their way or not. This resulted in wasting hundreds or thousands of dollars in commissions. But, with commission-free trading, you earn or lose only what you bet on, not a single penny extra.
Is Your Money Safe With a Commission Free Broker?
This is a legitimate question that people first asked when a few leading online brokers in the US announced commission-free trading. Let us understand how a broker can offer you free stock trading and yet increase their bottom line.
The first way how commission-free brokers make money is by transferring the idle cash that is available with them to a bank account that fetches higher interest.
The second way they make money is by charging interest on margins. Thirdly, commission-free trading is prompting more retail participation in the stock market; hence, these brokers benefit from more number of customers.
There are many other ways in which commission-free brokers earn revenue. And, back of the envelope calculations suggests that brokers who do not charge a commission generally have healthier bottom lines than those who do.
Hence, stay assured that the top of the class commission-free brokers are as safe as any other full service or discount broker. But, before you select the right one, it is always prudent to go through their expense list, balance sheet, and customer reviews.
How Can a Commission Free Trading Account Maximize Your Profits?
Zero fee trading is the new normal.
It has become so popular in recent times that many have gone on record saying that the stock market meltdown, combined with commission-free trading, has made this year as one of their best years for conducting business.
So, if you have been pondering over the idea to exploit free stock trading to your advantage, the best time is now. Here is why:
1. You Can Buy Lesser Number of Shares
Commission-free trading is a blessing for investors with small capital.
Sample this – you open an account with $100 and decide to buy a stock that is currently trading at $100. Earlier, you had to pay a minimum of $7 as the brokerage fee, which automatically increased the net buy price, thus giving more advantages to traders with high capital.
With a commission-free account, you can have the same kind of advantage as high net worth traders.
2. Use a Commission-Free Account to Diversify Your Investments
There is an unspoken rule in the trading industry – the more you diversify, the lesser the risks.
Suppose you have an account balance of $500, and instead of investing in one stock that costs $500, you decide to invest in five stocks with each costing $100. Assuming the brokerage as $7 per trade, you have to pay an extra $35 for buying five shares.
A commission-free account saves the extra cost and allows you to reap the maximum benefits of diversification.
3. Systematic Investment Plans Become More Rewarding
Many long-term investors prefer to buy stocks at periodic intervals. For some, it can be every week, while for others, it can be once every month or every year. Systematic investments allow you to capture all types of market conditions.
Whatever your investment type, commission-free trading can save more money than you can ever imagine. Conservative estimates show that you can make an extra $2,000 over 20 years by investing just $1000 every year, provided the annualized return remains fixed at 10%.
While commission-free trading makes investing and trading more convenient, it also leads to impulsive trading or over-trading. As getting in and out of stocks does not require paying anything extra, people often become prone to making mistakes.
The best thing you can do to avoid this is by having a paper trading account where you can record your imaginary transactions and see if your strategies are working or not, before putting in real money.
Although strategies determine the success or failure of your trading plan, not finding the right broker can take the shine off your trading plans.