America’s most popular online stock trading platforms surprised the markets last week when they announced commission free transactions for all customers. Charles Schwab, TD Ameritrade, Interactive Brokers Group, and E-Trade are now free platforms for American investors trading U.S. listed equities.
E-Trade was the last company to bring its program online, with transactions becoming commission free on October 7.
Great News for Private Investors
While the news won’t impact institutional investment firms or experienced traders who deal with personal brokers, zero-commission trading could help to attract more private investors to the market.
Commission free trades are not a novel idea. Robinhood, a popular financial services and stock trading platform, has been commission free since it launched six years ago. Company representative Jack Randal said that “The changes taking place across the brokerage industry reflect a focus on the customer that’s been inherent to Robinhood since the beginning. We remain focused on offering intuitively designed products that reduce barriers to our financial system, including account minimums and commission fees.”
By making stocks more accessible to the everyday American, it’s possible that capital flow will increase.
How Will Brokerages Compete Without Commission Charges?
While companies like TD Ameritrade and Charles Schwab will take a short-term hit from the loss of commissions, there is opportunity to gain revenue from other services.
Stock trading will become a gateway service for these companies, increasing the chance of an upsell to accounts that include:
- Managed brokerage services.
- Specialty accounts for trusts, pensions, and businesses.
- Margin trading with loans sourced directly from the trading platform.
- State-qualified (and sometimes tax-free) education investment accounts.
Online stock brokerages will follow models that the banking industry has used for years. They will attract new clients with low fees and commission-free trading, and then derive revenue from their other product tiers.
Online Stock A Great Move from the Finance Industry
Robinhood set the stage for commission free trading when it launched six years ago. With other online brokerages now following suit, everyday investors have more options.
Commission free trading removes one of the most significant barriers to entry on the stock market. Increased activity could potentially benefit investors at all levels.
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