Zero commission brokers are online stockbrokers that do not charge commissions for placing trades. This type of broker is typically a discount broker that simply charges lower fees overall. Read why this matters as an investor and how these brokers do make their money.
The different commission structures brokers have
There are a few different types of commission structures that brokers have. The first is a flat fee. This is a set amount that is charged per trade. The second is a per-share fee. This is a set amount that is charged per share traded.
The third is a percentage fee. This is a percentage of the total trade that is charged as a commission. This is where most brokers actively advertise to be zero commission brokers. Although true in theory, the perception most investors have is that this means no cost at all. This is wrong. It means that costs are potentially lower, depending on your activity.
And the fourth is a spread. This is when the broker takes a small percentage of the trade as their fee. This is almost never free, as it’s a way for brokers to cover their costs & less transparent to the beginning investor/trader.
How do zero commission brokers make their money?
There are a few ways that zero commission brokers make their money. The first is by charging lower fees overall. The second is by making money off of the trades themselves. When a trade is placed, the broker may take a small percentage of the trade as their fee. This is known as the spread. The third way that zero commission brokers make their money is through account fees. This includes fees for things like mutual funds and retirement accounts.
The choice is yours
By choosing a zero commission broker, you may be reducing overall costs compared to ‘tradition brokers’ that haven’t made that change just yet. However, it is no guarantee of saving money. This is why it is important to look at the broker’s pricing pages to understand if the zero commission structure works to your benefit, or not.