Many brokers now offer fee-free trading. Is it too good to be true?

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By

Hanna Horvath, CFP®

Hanna Horvath, CFP®

CERTIFIED FINANCIAL PLANNER™ & Managing Editor, Growth

Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™ and managing editor for growth at Policygenius. She helps produce the Easy Money newsletter, and owns all growth initiatives for Easy Money. She recently passed her exam to become a CERTIFIED FINANCIAL PLANNER™ in November 2020.

Hanna's work has appeared in NBC News, Business Insider and Inc. Magazine. She is regularly quoted in top media outlets, including CNBC, Best Company and HerMoney. She has also appeared on the Money Moolala podcast and All's Fair podcast.

Prior to Policygenius, Hanna wrote for KNBC in Los Angeles and WNBC in New York. When she isn't writing, she's (often) running, (usually) cooking and (sometimes) doing photography.

Published October 31, 2019|2 min read

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Updated Jan. 3, 2020: The fund giant Vangard now offers fee-free trading for all online stock and options trading.

Most online brokers now allow you to make trades and buy stocks commission-free.

Anything that has “free” attached to it is typically a good move for investors. But that doesn’t mean there are always zero costs involved.

Thinking of investing? Here’s what you need to know about commission-free trading.

What are commission-free trades?

Commission-free trading means buying and selling stocks without paying brokerage fees, trade commissions or transaction fees.

Robinhood, an online stock app, was one of the first brokerages to give users the ability to buy stocks and exchange-traded funds for free. We have a complete review of Robinhood here.

Charles Schwab announced in the beginning of October it would stop charging commission for ETFs and stocks. Now nearly every major brokerage has said they would offer commission-free trading, with Bank of America announcing last week that customers in its banking loyalty program could make free trades.

What does this mean for investors?

Individual investors will benefit from fee-free trading. Keeping costs as low as possible is a smart investing move.

“Is this good for the public? Absolutely,” said Dennis Nolte, certified financial planner and vice president of Seacoast Investment Services. “Now anyone can get in on the investing game.”

Nolte said the removal of commission fees will encourage people to invest who might not have before.

“There’s an incentive to try different things,” he said.

Keep an eye on your accounts, however, as some brokers may remove or charge for previously free features to make up for lost revenue, like 24/7 customer support or educational tools.

Gary Quinzel, head of investments at Wealth Enhancement Group, said the switch to commission-free trading is meant to be a push against an industry shift toward more customers using financial planners. Brokerages hope to entice investors away from pricier advisers with free trades.

But investors may want the hands-on approach of an adviser instead, said Quinzel. If you’re considering tapping a financial adviser, we have a guide on how to find one.

How to get started investing

Want to be a successful investor? Play the long game.

Nolte recommends investing as soon as possible. The longer you let compound interest work, the higher your returns can become. Your biggest asset in investing is time, he said.

“Take a long-term approach to investing,” Quinzel said. “Invest in companies and funds that have a good background and long-term growth potential, ones that are deeply seeded in value over profit.”

Avoid market timing, known as the strategy of buying stock by predicting future market movements, said Quinzel. And if you’re still unsure on where to start, we have a guide to picking stocks here.

Image: Hugo Barbosa