Stocks are shaking off their dowdy image after being upstaged by the hot cryptocurrency sector. Leading stock indices roared into the new year. In the first quarter of 2019, the S&P 500, Dow Jones Industrial Average and NASDAQ made their strongest start to the year in decades.
With more no fee online stock traders to choose from, investors are not leaving their money sitting idle. No fee investing apps are surpassing Fidelity, Vanguard and eTrade in weekly downloads.
If you took a gander at a no fee broker like Robinhood a year ago, it is worth another look. The freemium model makes money on valued added services. Free brokers are adding new services to rival those of premium brokers.
But is anything really free in life? Investors need to be on the look out for wide bid-ask spreads, and other hidden fees.
Best 0% Commission Free Stock Trading Sites 2019
How to Choose an Online Stockbroker
‘No fee’ online stock trading accounts can be deceptively expensive if the following account features are not priced competitively:
The spread is the difference between the bid and ask price of a stock or other security expressed in pips. The bid is the highest price buyers will pay for the stock. The ask is the lowest price sellers will accept. Brokers with tight spreads have less price slippage, and therefore traders have a higher potential to profit placing a trade with a broker with a, say, 2 pip spread on the EUR/USD pair than a 4 pip spread.
Margin lending rates
Margin lending enables you to borrow money to invest. The money and securities in your brokerage account serve as collateral for a loan. A margin loan of 1:50 – the leverage – lets you borrow up to 50 percent of your account assets. The interest rate charged on the loan is part of your trading costs. Shop around. Compare the lending rates, loan-to-value (LTV) and leverage offered by brokers.
Slippage is the change in price from the time a trade is entered to the time it is executed. If you enter an order to buy Apple at 190, a thousand other trades processed on faster systems (up to a millionth of a second) may be filled before your order. Let’s suppose these faster orders are mostly buy orders bidding up the price. By the time your order is executed, the price has increased to 191. However if more sell orders were processed, the price could decline in your favor.
Futures and options fees
Futures and options are low cost risk management tools. These derivatives instruments enable investors to hedge or speculate on future price movements for a fraction of the fee of directly trading the underlying asset.
The key to improving your investment returns using the freemium model is to sniff out all the hidden costs, starting with the bid-ask spread. Currency translation fees and account transfer charges are other common hidden fees. Equally important, ask how the broker is earning money for you. Services like tax harvesting, dynamic rebalancing and cash sweeping can improve your returns. If you cannot easily and cheaply transfer excess cash in your account into higher returning investments, the broker will be earning the interest on your account balance, not you.[/su_list]
Online broker minimum deposits vary. No fee broker models have significantly lowered the minimum. Some allow you to start trading with $5–10. Premium brokers may require that you have not only a high minimum account balance but also meet an asset test (e.g., minimum assets of $25,000].
Payment for order flow is the practice of brokers routing their orders to preferred market makers and dealers in securities in exchange for commissions. These third parties do not always provide the best pricing and trade execution speed for clients. Some brokers use these commissions to subsidize low or no fee brokerage services.
In some countries a tax or duty, often called a stamp duty, is charged when shares are bought. In the UK, the stamp duty on electronic purchases of stock is 0.05 percent. In the US and many European markets, no stamp duty is charged.
The spread is the difference between the bid and ask price expressed as a percentage. For a bid price of $70 and ask price of $100, the spread would be 30 percent.
Level 2 data shows the current bid and ask prices and related volume for a security trade. This information allows a trader to evaluate the current supply and demand for the security.
The LTV ratio determines how much you can borrow on margin and when a margin call is made. It is calculated by dividing the amount borrowed to buy securities divided by the amount you have in your broker account (securities + cash).
If as a result of a losing position your balance falls below your account asset value and a pre-established loan to value ratio (LVR), you will receive a margin call. A margin call requires you to restore the original value by depositing more money and/or securities in your account. The lender could also sell your shares to repay the loan.
Leverage refers to the amount of debt-to-capital a trader assumes by borrowing on margin. It is represented by a ratio of, for example, 1:30. If you deposit $1,000 in your brokerage account, you will be able to invest up to $3,000. If you invest $3,000 in Facebook stock and the stock gains 20 percent, your gain will be $600 versus $200 without leverage. Conversely, if the price declines 20 percent, your loss is $400 greater. Given the potential to multiply not only your gains but also your losses, the amount of leverage you choose to use should reflect the amount you can afford to lose.