How much is your free trade account costing you?
Are commission-free investment accounts actually free? It’s funny what people ponder in the shower, embarrassingly this question was on my mind the other morning…so I did some digging. Commission-free brokers have been growing in popularity both in the US and the UK, with the OG being Robinhood in the US and the likes of Revout, Freetrade, eToro, Trading212 and Plus500 to name just a few in the UK.
Just because its free, doesn’t mean you should be trading.
Here are 5 revenue streams used by 0% commission brokers:
- Interest on cash balances - Brokers like Freetrade profit by lending out cash held on deposit for a higher interest rate than what the investor is offered.
- Payment for order flow - This is a controversial revenue stream, not allowed in the UK, where brokers get paid by directing customer trades to certain market makers for execution.
- Premium services – They offer wider stock lists and product offerings, are offered on a subscription basis by companies like Revolut and Freetrade.
- Margin interest - Trading212 and eToro make revenue by charging interest on the amount loaned for derivative trades like CFDs.
- Bid-offer spread - Brokers earn revenue through the bid-offer spread, which is the difference between the buying and selling price quoted on each trade.
Things to consider when trading with commission free brokers:
Fractional share dealing – fractional dealing works where instead of buying a whole shares of a company, you just buy a portion. This is useful for investors with smaller amounts to invest.
Why is it important? As you can’t but a fractional share on the open market, the broker may aggregate your order with other orders, which could lead to a delay in executing the trade.
Gamification – Just because its free, doesn’t mean you should be trading. Where some revenue is generated by the amount of trades you execute, it’s in the interest of the brokers to encourage more trading. This has lead to a game like feel to some apps.
Why is it important? Like gambling it can lead to emotional and irresponsible trading. Just because its free, doesn’t mean you should be trading. Where revenue is generated by the volume of trades you execute, it’s in the interest of the brokers to create an app that encourages maximum trading.
