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Best Free Stock Trading Brokers of 2021
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Trading stocks used to be difficult for newer investors or people with smaller portfolios to make a profit. Any hopes of gains would evaporate when it was time to pay the transaction fees on purchases and sales. However, that’s all changed with the new trend of free stock trading sweeping the industry. Investors can now make commission-free stock trades through online brokerage firms. The best free trading platforms offer no commissions, no membership fees, helpful research resources and user-friendly websites and apps that cater to investors of all skill levels.
The 7 best free stock trading brokers of 2021
- Robinhood: Best for Beginners
- Charles Schwab: Best for Buy-and-Hold
- E*TRADE: Best for Active Traders
- Fidelity: Best Mobile App
- Merrill Edge: Best for Self-Directed Investors
- Interactive Brokers: Best Desktop Platform
- TD Ameritrade: Best Educational Resources
Best free stock trading brokers at a glance
|Provider||Mobile App Rating||Self-Directed, Robo or Advisor?||Key Benefit|
|Robinhood||3.75/5||Self-directed||Cash not invested earns 0.30% APY|
|Charles Schwab||4.6/5||Self-directed and advisor||Widest array of additional products|
|E*TRADE||4.1/5||Self-directed, robo and advisor||No fees for mutual funds|
|Fidelity||4.6/5||Self-directed, robo and advisor||Margin rates starting at 5.00%|
|Merrill Edge||4.35/5||Self-directed and advisor||Integrates with Bank of America banking|
|Interactive Brokers||3.5/5||Robo||Invest in global stocks|
|TD Ameritrade||4.0/5||Self-directed, robo and advisor||Multiple innovate account management tools|
How to find 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.
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.
How should I choose the right free stock trading broker?
Choosing the right free stock trading broker is a critical step in your investment journey, as you will most likely spend the next few years or longer investing through the platform. Some of the most important things to consider when making your decision include the quality of the desktop and mobile apps, the reliability of the customer service, any lucrative promotions and the overall trust you have in the provider.
Additionally, look for any added resources, helpful tools or research platforms that you may gain free access to as a client. While these things are not necessary to make a commission-free trading platform the right fit, it’s always smart to get the most bang for your buck.
[Read: How Can I Buy Stocks Online?]
How do I claim stock returns on my income taxes?
If you make money on your stock investments, you will be required to pay taxes on those gains. What you will pay and when you will pay will depend on several factors. For stocks that you hold for less than a year, you’ll pay your normal income-tax rate.
If you hold the stocks for longer than a year, you won’t owe income tax, but you will owe capital gains taxes. The percentage you owe on these gains will be from 0% to 20%, dependent on your taxable income.
For investors that own dividend-paying stocks, you’ll need to ensure you pay taxes on your dividend payments every year. You will receive a Form 1099-DIV each year from each company that you earn dividends from letting you know how much you need to report.
While paying taxes on income gains is never fun, many would agree it’s a good problem to have.
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 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 $5. Doesn’t sound like a lot to you? Then consider it adds up to $60 a year if you don’t pay the $1,000 back quickly. 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.
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.
We welcome your feedback on this article and would love to hear about your experience with the stock trading brokers we recommend. Contact us at firstname.lastname@example.org with comments or questions.