Using brokers with commission-free trading offers an obvious benefit for traders, reducing the consistent build-up of trading fees and management costs. The trend is clear – more and more brokers are offering free stock trading. In this guide, we explain how brokers with commission-free trading work in 2023, how to compare them and the pros and cons of low trading fees (yes there are actually drawbacks!). We have also compiled a list of the best low fee brokers below.
Top Brokers With No Fees
What Is Commission-Free Trading?
Commission-free trading means that there is no fee for placing a trade. Typical commissions with other brokers are between $5 and $50, depending on the services and equities on offer, so removing these can really make a difference.
Commission-free trading relieves investors from one of the costs that ultimately reduce their overall profit margin.
Commissions can differ due to a range of factors including the size and timing of a trade, the market you trade on and the strategy you use.
For retail investors, the cost of a trade is mostly in the size of the commission. However, commission costs can affect both retail and institutional traders. Therefore, brokers with commission-free trading can be an appealing option for all.
The trend of offering free trading has surged in recent years.
Zero-fee stock trading was pioneered by some US brands and, since then, other high-profile brokers have reconsidered their pricing model to continue to attract and retain customers, as well as their market share.
Brokers with no trading fees are particularly attractive to those traders who typically have less money to invest.
How Brokers With No Fees Work
It is clear why zero commission trading is appealing to investors but how do brokers with commission-free trading make their money?
The commission-free movement has forced brokers to conduct other business activities to earn a profit.
Payment For Order Flow (PFOF)
Payment for order flow is a primary way that commission-free brokers make money. Smaller brokerages sell order flow to exchanges or market makers who, in turn, generate revenue by providing liquidity in various securities. Market makers tend to make more money by trading against retail order flow.
However, this can be at a disadvantage to investors. To make money from commission-free trades, the payments for order flow used by brokers may lead to poor quality order execution, higher buy prices and lower sell prices. Delays in executing market orders can generate opportunities to adversely impact quality and build profits for brokers with commission-free investing.
Larger brokers with commission-free trading, like Fidelity, also encourage an inflow of cash. These brokers can take the excess cash to invest in securities or lend it out, much like banks do. Brokers have also begun offering “cash management” accounts, similar to savings accounts, where client money is moved to partnering banks where it can earn interest. Brokers make their money by keeping the majority of this interest for themselves.
Profit sources other than margin lending could include monthly fees for upgraded services and rehypothecation, which allows brokers to use client securities as collateral to support other financial activities. However, this can have consequences if the financial system is under pressure.
How To Compare Brokers With Free Trading
In this day and age, most brokers will offer free trades in some shape or form. As with any investment, it’s vital to know what you’re getting into and choose the right broker if you want to avoid hidden fees and make the most from your investments. Therefore, traders need to look beyond commission-free investing and do more robust research into other factors like analysis tools, strategy support and trading platform.
Below, we have listed some key things to consider when choosing brokers with commission-free investing:
Brokers that have easy-to-use interfaces are great for all traders but especially for beginners. Popular third-party trading platforms include MetaTrader 4 and MetaTrader 5, which have a good balance of advanced functionality and intuitiveness. However, many brokers offer their own platforms and applications, often slimmed down to be more user-friendly, and these can be great for newer traders.
Which assets can you trade? Some brokers with commission-free investing offer fractional share trading, which is particularly popular with new investors. Other platforms let users trade contracts for difference (CFDs) too, allowing you to speculate on price movements in securities like shares, cryptocurrencies, indices and commodities. Choosing one of the many multi-asset brokers with commission-free investing means that you can diversify your trading portfolio at a lower cost.
It is important to remember that, when a broker offers commission-free investing, it means that they do not charge their own fee for helping execute the trade. Ultimately, there may still be other fees involved such as exchange fees and careful consideration of these will be key to making the most of your investments and returns. Brokers with commission-free investing could also charge withdrawal fees, inactivity fees, overnight swaps and subscription fees.
We recommend that you choose a licensed broker that is properly regulated by a reputable organisation, such as the UK’s Financial Conduct Authority (FCA) or the EU’s Cyprus Securities and Exchange Commission (CySec). Additionally, some brokers require ID verification on signing up, which provides added protection. Two-factor authentication (2FA) and biometric logins for mobile applications can also be a great way to reduce the chances of someone gaining access to your account and funds.
It is all well and good choosing brokers with commission-free investing but be aware of limitations like minimum deposits and whether these will make the broker inaccessible. Brokers with low minimum deposit may be better for beginner traders whereas more experienced traders may well be able to afford a higher minimum deposit.
If you have a question or need help, how contactable is your broker? Are they available by phone and/or email? Are they on social media platforms like Twitter or Telegram so that you can reach them if not? Using brokers with great customer service is key no matter if it’s for free or now, no one wants to have their account break down while a large trade is on the line and needs to be closed before it incurs significant losses.
Mobile trading provides investors with an accessible way to manage their accounts and positions. Choosing brokers with commission-free investing that also has a feature-rich trading app built for everyday investors combines low costs with accessible, on-the-go investing.
Brokers with commission-free trading are even better if they provide industry-leading educational resources, such as webinars, tutorials, videos, blogs or articles. These resources are particularly useful to beginner traders, who often need a little more guidance and learning on how to invest successfully.
Pros Of Zero Fee Brokers
- More accessible
- Improved profit margins
- No commission on trades
- Cheaper portfolio diversification
- Good for beginners or those who have little capital to invest
Cons Of Zero Fee Brokers
- Lower sell prices
- Higher buy prices
- Increased spreads
- Potentially other hidden fees
- Lower quality order execution
Final Word On Trading with Zero Fees
Brokers with no fees or commission have seen an upward trend in popularity over recent years. Despite the obvious benefit of holding on to more of your profit margin, choosing brokers with zero fees is not necessarily always the best option. Although it may seem so on the surface, commission-free trading is rarely completely free and many firms will simply recoup this cost elsewhere. The commission-free movement has forced brokers to conduct other business activities in order to earn a profit, such as payment for order flow. This can be at a disadvantage to investors and so you need to decide whether it is worth paying for better order execution and buy/sell prices.
What Are The Pros and Cons Of Using Brokers With No Fees?
The obvious advantage of commission-free trading is not having to pay fees on trades, which can help to improve profit margins. It also means that investors can diversify their trading portfolio at no additional cost. Commission-free trading is particularly good for beginners who may have less capital to risk at first.
There are a few somewhat hidden drawbacks however. The broker of course will make money in some other way, that is even less clear to traders. E.g., by not offering the best asset prices and pocketing the difference. Also, when there is no obvious cost to buying or selling an asset, it can encourage reckless trading and end up costing the trader a lot more in the end.
Who Are The Top Brokers With No Commission?
You can see our full list of zero fee brokers that are available in your country. For US traders, Interactive Brokers is an excellent broker with commission-free investing, while eToro has one of the best bespoke commission-free platforms and is available in many countries. ETX Capital offers commission-free trading on many of the most popular share CFDs. Other popular brokers include ActivTrades, FXTM and FBS.
How Do Brokers With No Commission Make Money?
By waiving commissions, brokers must engage in other business activities to build profits. However, these can sometimes be at a disadvantage to traders. Most brokers sell order flow (PFOF), though this can lead to poor quality order execution, higher buy prices and lower sell prices. Other profit sources include margin lending, monthly fees for upgraded services and rehypothecation.
What Should I Consider When Choosing a Brokers With No Fees?
Some questions to ask yourself are whether it is worth using a discount broker for some assets but not for others. Consider the drawbacks of trading with “zero fee” brokers – is it worth getting a discount for slower trade execution and potentially higher buy or lower sell prices? Do your research and ask yourself what is important for your goals.
Is a Brokers With No Commission Really Free?
Unfortunately, no. Trading with no commission just means that no additional fee has been charged for the purchase of a stock or the opening of a position. Most brokers will find a way to charge other fees, such as management fees, administration fees, or deposit and withdrawal fees, or make money in much less candid ways, like selling their order flow. No broker would offer services they couldn’t profit from one way or other, the question is how much their specific model benefits or disadvantages you as a trader. Trading too much and thus incurring losses is also a “cost”, which is more likely to happen if there is no reason to pause and think before opening a position.