Thursday, October 3, 2019

Stock Investing is Commission Free in the US

As an investor, there are a few things you can control. You can control how much you save, what strategy you have to achieve your goals, your temperament and your ability to keep investment costs low. In this article I will discuss how easy it is today to keep investment costs low. As low as zero actually, using a commission free broker. There seem to be plenty of them these days, and the numbers are only getting bigger from here.

I have long been a fan of commission free brokers. I used broker Zecco extensively a decade ago, until it started charging commissions and merged with Tradeking. There have been a few other brokers charging zero commissions, namely Robinhood and Merrill Edge. Merrill Edge does have some hoops to jump through in order to qualify for 30 to 100 commission free trades, but in my opinion these were not to tough to accomplish, provided you had the assets and bank and broker accounts needed.

Over the past five years, I have been a big fan of Robinhood brokerage, which charges no commissions to buy or sell stock ( there is a small fee to sell, but this is a regulatory fee that is simply passed though). Robinhood has disrupted the world of online stockbrokers, since it offered commission free trading long before it was the norm with stocks and ETFs. I have seen a lot of negative publicity against Robinhood, mostly because it generates revenues by selling order flow. After using Robinhood for five years, I can attest that my order fills have been quick and the price I received has been comparable to prices I get from other brokers. The difference is that with other brokers, I paid a commission and the broker also earned money by selling my order flow. With Robinhood, I paid nothing in commissions and my entry price was comparable. Most negative publicity ignored the fact that other brokers also received money for order flows and shorting stock, and also charged fees to transact on top of it.

Last week, Interactive Brokers announced that it was launching an Interactive Brokers Lite account. This is a commission free account, which had no inactivity fees. The account is scheduled to be launched this month, but I have not heard specific on the timing. The account would offer commission free trading, which is a pretty good deal for investors, used to paying $5 - $10/trade. Interactive Brokers is already a great broker for dividend investors, as it allows direct access to the stock market at a very low fee of 35 cents/trade to $1/trade. Depending on the order you place, you may also end up being paid to add liquidity to the stock market. That’s a fee that most other brokers tend to pocket for themselves.

The nice thing is that Interactive Brokers is open to non-US based investors. So if you are based in Canada or the UK or another country, it means that you can potentially invest in US listed securities by paying no commission. That’s a game changer.

Interactive Brokers opened the floodgates with their announcement. Within a few days, Charles Schwab decided to offer commission free stock investing for stocks and ETFs, starting October 7th. Prior to that Schwab charged $4.95/trade. There are no account minimums, but the nice thing is that they have great customer service and local branches to visit. This is open to US investors only however. Schwab already had a list of commission free ETFs it was offering. However, ETFs carry a small but ongoing annual fee to investors. They will still charge a commission to buy or sell options.

Next, we had TD Ameritrade decide to offer commission free stock and ETF investing as well. TD Ameritrade has a list of commission free etf’s as well. However, it charged $6.95/trade to buy or sell stocks. They will still charge a commission to buy or sell options, similar to Schwab, Interactive Brokers and Etrade. Robinhood doesn't charge for options trading.

Finally, just a few hours ago, we also had Etrade join the party of zero-commission stock trades. Etrade had a line-up of commission free ETFs already. However, Etrade has some hidden fees related to selling ETFs within 90 days, and some fees if you have a reverse stock split, a company is acquired for example. I have been charged those fees, and had some of them waived, but I am just throwing this out there - be cautious and always read the fine print.

It is interesting that Interactive Brokers set off the chain reaction with their announcement last week. Ironically, the IBKR Lite account is not ready to be opened yet. However, for Schwab, TD Ameritrade and Etrade, you can open an account and invest commission free starting on October 7th at the very latest.

There are a couple smaller brokers offering commission free trading since last year. The first one is Firstrade, which offers free stock and ETF trading. The broker also offers different account types, such as IRA. Robinhood didn’t offer these types of accounts. Firstrade is also open to investors from a few countries outside the US – China, Taiwan, Hong Kong, Macau, Japan, Mexico, New Zealand, Singapore, Korea, Republic of (South) and Israel.

Another commission free option was M1Finance, which lets you build your own portfolio without paying a commission. It also allows investors to build portfolios with partial shares, but is more geared towards investors who buy the same securities. It is easy to set up a portfolio with the same 10 or 20 or 100 securities and equally weight it. If you want to buy the same securities every so often, and just do rebalancing between the two, M1Finance sounds like a perfect broker. However if you buy 10 companies this month, and then want to buy ten different companies next month as so on, it is impossible to execute using M1 Finance. They do offer different types of IRA accounts as well however.

A commission free broker which is not really advertised as such is Motif Investing. It lets you buy partial shares in equities commission free, provided that you schedule your order for the open at the next day. It is very easy to create an equally weighted portfolio by putting $10 in 50 companies. The other thing to consider is that there is an inactivity fee provided you do not make a paid transaction within a certain time period OR you do not keep a certain amount of investments in your portfolio. If you keep more than $10,000 at Motif, this is not a problem however.

Overall, I wanted to share that it has never been easier or cheaper to buy individual stocks in the US. While plenty of brokers offer commission free ETF trading already, this was still a limited list of what you can and cannot invest in. With commission free stock investing, you do not need to check if your investment is pre-approved by someone else – you can just buy it and not pay a commission.
However, you always need to review the commission and fee schedules for your brokers, even if they claim to be commission free. That’s because some brokers have some “gotcha” clauses that you need to be aware of. A few notorious examples include inactivity fees, or fees if your account balance falls below a certain dollar amount. In general, you want to avoid these.

Some brokers charge you for a security reorganization, which is a broad term that could apply to stock splits, reverse stock splits, spin-offs to name just a few corporate events that are expensive.
You can also expect to be charged a fee if you hold certain instruments, namely ETFs or mutual funds for less than 30 or 90 days.

Finally, if you plan to close your account and move securities to another broker, you can expect to be charged a fee. If you close a retirement account, you will likely be charged a fee as well.

When you keep investing costs low, this means that you keep more money working hard for you. This goes on for commissions, but should also be something to think about in terms of minimizing taxes. This could be easily achieved in the US by opening a Roth IRA account, and doing more of your investing through it. Everyone’s tax situation is different however, so you need to consult with a tax adviser, because of different limitations and opportunities. If your adjusted gross income is below a certain amount, you are not going to pay taxes on certain amounts of dividends and capital gains. Again, you need to consult with a tax professional to see how this applies to your situation ( or research it on your own).

The best thing to come out of this exercise is that investors are winning in the end. Plus, there is more emphasis on cost than ever before. This goes beyond commissions, taxes and fees however. I believe that the days of paying an adviser 1% to assemble a portfolio for you are also coming to an end. This may be bad for asset managers.

Thank you for reading!

Relevant Articles:

Robinhood Offers Free Stock Trading for Dividend Investors
The Best Broker for Dividend Investors: Interactive Brokers
Merrill Edge Offers Commission Free Trades for Dividend Investors
Roth IRA’s for Dividend Investors
Best Brokerage Accounts for Dividend Investors

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