I’ve been investing for over a decade and have rubbed elbows with many different kinds of investors. It never ceases to amaze me how some very successful investors are still overpaying in fees and commissions. But thankfully, there are a handful of stock trading brokers out there who can reduce your trading costs to effectively zero.
If you want the flexibility to pick smaller stocks and trade every month, or even every week, then Robinhood’s free mobile trading platform is for you. But, if you fancy yourself a long-term, buy-and-hold type, then Charles Schwab is a great choice. You get all the benefits of a full-service broker if you need it, and hundreds of free ETFs you can trade to your heart’s content.
The Best Free Stock Trading Brokers
Most people fall into one of two categories — self-directed active traders who like to pick individual stocks and trade frequently, and buy-and-hold investors who tend to pick diversified ETFs and stick with them for years or even decades.
One simple way to decide your investing style is to look at your account statement and add up the number of trades you’ve made in the last 90 days. Is it three or fewer, equating to about a trade each month? If yes, you are a buy-and-holder. If it’s four or five, you are likely more of an active trader, and if it’s more than six, or one trade every two weeks, you are most certainly in the “active” camp.
Even Modest Stock Trading Fees Can Add Up
Of course, the irony of me harping on costs is that many investors are paying lower fees than ever before to invest in the market. Consider a Business Insider report that quotes one veteran broker who estimates an average trading commission was $45 in the 1980s, and it wasn’t uncommon to see larger orders cost an investor hundreds or even thousands of dollars.
If you’re paying $10 a trade, then it may seem like you’re way ahead of the game. But even a small amount of fees matters big-time, since any money you give your broker is cash that’s not accumulating bigger profits in the market.
Consider this math:
- You have $1,000 to invest, and make five consecutive trades that net 30% returns each. With zero transaction fees and compounded returns, you finish with $3,713.
- You have $1,000 to invest, and make five consecutive trades that also net 30% returns each, but this time you are charged a $10 commission to buy or sell. You instead finish with $3,531 – a nice gain, but around $200 less in total profits when you account for both the cost of commissions and lost profit on money paid to your broker.
On the surface, $10 doesn’t sound like a lot of money. But as you can see, over time even those seemingly modest costs can really add up.
How I Found the Best Free Stock Trading Brokers
It’s not hard to find an offer from a broker that promises you free trades. But not all “commission-free” platforms are created equal. I dug into roughly a dozen of the most popular brokers out there including:
- Charles Schwab
- Interactive Brokers
- Merrill Edge
- TD Ameritrade
- Ally Invest
Among these platforms, I investigated the following factors.
Free Trades that Last: It’s common practice in the broker biz to offer an initial discount to win new clients and then ratchet up the cost per trade after a few months. But what’s the point of buying a stock or an ETF for free today only to be charged a big-time commission to sell it tomorrow?
A Wide Menu of Commission-Free Options: It’s also increasingly common for brokers to tout commission-free ETF trades. For instance, Vanguard offers about 70 commission-free ETFs under its own brand to customers. But many of them are boring mainstream funds that skew toward large, US-based corporations — meaning any truly tactical trades won’t be covered in this limited universe of commission-free options.
No Sneaky Costs That Offset Savings: Brokers aren’t nonprofits, of course, so if they’re waiving fees, then they’re looking to make money in other ways. That means reading the fine print to see if there are other surcharges that could eat away at your savings in a similar way to conventional commissions. For instance, it’s also worth noting that Vanguard’s brokerage platform will tack on a $20 annual account maintenance fee if you’re a small-time investor with less than $10,000 invested in its branded mutual funds and ETFs.
Perhaps unsurprisingly, I found a lot of different fee structures out there and a lot of variation between brokers. There’s no clear winner that offers a ton of free trades in a flexible format, so if you’re looking to do everything from options to futures to active trading, you’re probably best simply sticking with Ally Invest — a platform I rated the Best Overall Discount Broker because it is cost-effective in all asset classes. It’s not free, of course, but it offers low prices across the board.
Best for Active Traders – Robinhood
When Robinhood says it offers free trades, it means it. You can trade thousands of stocks and ETFs commission-free. The company realizes this kind of claim seems way too good to be true, so it has an explanation on its website about how Robinhood actually makes money. The answer: by instead charging fees to investors who choose to trade “on margin”. That is, investors who borrow money from Robinhood in order to make investments.
If that sounds risky, that’s because it is. After all, the only thing worse than losing $1,000 of your money in the stock market is losing $1,000 of someone else’s money and having to pay big interest penalties until you repay your debt.
Think of it like a local bank, where “bad” customers who bounce checks get charged big fees and have to shoulder much higher interest rates, while “good” customers who pay their bills on time get free checks and other perks. Let Robinhood worry about making money from aggressive investors who trade on margin, and instead simply enjoy the free trades those folks are helping to subsidize.
Is Robinhood Right for You?
If you’re more of an old-school investor, Robinhood isn’t a good fit for you. The mobile-based experience isn’t exactly designed for geeks who prefer eight computer monitors with charts, company filings, market news, and other real-time research at their fingertips before they hit “buy.” Similarly, conservative investors who want to buy and hold a diversified portfolio simply don’t have access to investments like bonds or mutual funds.
Also, if you want more than just stocks and ETFs, Robinhood may not fit. Mutual funds, bonds, options, or OTC stocks are simply not available for trading at any price or fee structure even if you want to.
However, if you’re actively trading NYSE- and Nasdaq-listed stocks or ETFs and you’re comfortable with using your iPhone or Android smartphone as your primary trading station, Robinhood is the only option that allows truly commission-free stock trades.
Another minor downside is that Robinhood lacks a lot of the educational resources like the webinars or on-demand video archives offered by more established brokers. If you’re a seasoned stock trader, however, it’s a no brainer to cut out some of the services offered by typical brokers in exchange for commission-free trades. You have to go it alone when it comes to research and resources, but if you’re a veteran investor you may actually prefer it that way.
Best for Buy-and-Hold Investors – Charles Schwab
Charles Schwab pretty much helped create the discount broker model as we know it after changes to financial regulations over 40 years ago. So it’s not really a big surprise that after pioneering low-cost investing in decades past, Charles Schwab is now focused on innovations that will drop costs for investors even more.
With 200 commission-free ETFs for account holders, Charles Schwab offers a robust list of funds that other brokers can’t match. Vanguard, for instance, only offers 17 commission-free ETFs (along with 36 mutual funds), and Fidelity only offers 91 commission-free ETFs — many of which are conventional index funds and not very tactical in nature.
Charles Schwab, on the other hand, offers old favorites like a low-cost S&P 500 index fund as well as strategic ETFs that include everything from the Wilshire Micro-Cap ETF (WMCR) to a micro-cap ETF to the SPDR® S&P 500 Fossil Fuel Reserves Free ETF (SPYX).
You can’t trade individual stocks like you can with Robinhood, of course, but you have plenty of raw materials to build an agile buy-and-hold portfolio that contains much more than plain-vanilla index funds you can find anywhere these days.
Is Charles Schwab Right For You?
If you’re planning a buy-and-hold strategy with funds, Charles Schwab has a lot to offer. As an account holder, you’ll have access to top-notch market research, a learning center full of how-to videos, and even in-person workshops sponsored by your local Charles Schwab office.
And should you grow beyond buy-and-hold and want something more sophisticated, this is a full-service investment firm that can help you in all areas, from options trading to personalized wealth management services to even refinancing your home loan.
If you’re not mainly using ETFs to manage your portfolio, then you’ll be paying an above-average rate of $8.95 for each transaction. Other discount brokers like Ally Invest offer transactions for just $4.95. And of course, there’s Robinhood’s fee-free model as outlined above. That means if you’re frequently trading stocks or ETFs not offered on a commission-free basis, Charles Schwab is going to cost you.
Stock Trading Fees to Keep in Mind
I’m a big believer in keeping down investing costs. And keeping your commissions in check isn’t the only way to guard against unwanted fees in your investment portfolio. A few other important expenses that can add up include:
Margin Interest: As I mentioned in reviewing Robinhood above, the company makes its money by charging investors who trade “on margin” with borrowed money. The fee structure at Robinhood allows you to secure $1,000 of buying power for 30 days for a cost of $6. Doesn’t sound like a lot to you? Then consider it adds up to $72 a year if you don’t pay the $1,000 back quickly — that’s a 7.2% annual rate. You easily offset any savings from commission-free trading with that kind of cost structure, so be wary of trading on margin.
Fund Expenses: While brokers like Fidelity, Vanguard, and Charles Schwab may waive commissions on some funds, those investments aren’t 100% free. Every mutual fund or ETF carries an “expense ratio,” or an annual charge that is automatically deducted from your investment returns without you seeing it. Take two commission-free offerings from Charles Schwab: the U.S. Broad Market ETF (SCHB), with a super-low expense ratio of just 0.03%, and the John Hancock Multifactor Mid Cap ETF (JHMM), with a moderately high expense ratio of 1.11%. The first will cost you just $3 annually on every $10,000 invested while the other will cost you $110 in expenses. If you really want that second fund for the strategic advantage, that’s fine, but remember it needs to perform much better to offset the additional cost.
Taxes: The IRS taxes all investment profits as capital gains, but short-term investments are taxed at a significantly higher rate. For a married investor who files jointly and has a household income of $120,000 a year, they would pay a 15% tax rate on profits for stocks held more than a year. But if that investor buys and sells within a few months, they would pay a 25% tax rate. Or put another way, a $10,000 investment profit turns into $8,500 after a 15% tax if you held your stock for 366 days. If you hold for 365 days, that profit is just $7,500 after a 25% tax.
Going with either of these “free” brokers is a great start to keeping your expenses down. But remember that commissions aren’t your only cost center.
The Bottom Line
Robinhood is amazingly cost-effective for those who want to trade popular stocks and ETFs. There aren’t a lot of bells and whistles on the mobile-only platform and it lacks access to penny stocks or options, but the big savings that can add up for active investors more than offset those commissions. If you are more of an old-school investor looking for a cost-effective way to trade funds without sacrificing research tools, educational resources, or access to alternative investments if you need them, then Charles Schwab has you covered with a big list of commission-free ETFs.