Commission-Free Trading: What to Know

Commission-free trading has transformed how everyday investors access the stock market. What used to cost $10 or more per trade is now free at most major brokers. But free does not mean there are no costs. Understanding how commission-free trading really works will help you make better decisions about where to trade.

The Rise of Commission-Free Trading

In 2019, Charles Schwab shocked the industry by eliminating commissions on stock and ETF trades. Within days, every major broker followed suit. This race to zero changed the landscape permanently.

Before this shift, paying $4.95 to $9.99 per trade was standard. Active traders could pay thousands of dollars in commissions each year. Now, you can buy and sell stocks without paying a penny in trading fees.

How Brokers Make Money Without Commissions

Brokers are businesses. They need revenue to operate. If they are not charging you commissions, they are making money in other ways:

1. Payment for Order Flow (PFOF)

This is the most controversial revenue source. Brokers sell your trade orders to market makers like Citadel or Virtu. These firms pay a small amount (typically fractions of a penny per share) for the right to execute your trades.

Market makers profit from the spread between the bid and ask price. Critics argue this means you might get slightly worse prices on your trades. Supporters say the savings from zero commissions far outweigh any price impact.

2. Interest on Cash Balances

Money sitting in your account earns interest for the broker. They pay you a small amount (or nothing) and earn more by investing that cash. With millions of customers, this adds up quickly.

3. Margin Interest

When you borrow money to trade on margin, you pay interest. Margin rates typically range from 5% to 12% annually, depending on the broker and your balance. This is a significant revenue stream.

4. Premium Services

Many brokers offer paid tiers with advanced features like better data, research, or lower margin rates. They convert free users into paying subscribers.

5. Securities Lending

Brokers can lend out shares in your account to short sellers and earn interest. You may not even know this is happening unless you read the fine print.

Hidden Costs to Watch For

Options Contract Fees

While stock trades are free, options trades typically cost $0.50 to $0.65 per contract. Trade 100 contracts and you are paying $50 to $65. This adds up for active options traders.

Account Fees

Some brokers charge fees for:

• Account transfers (ACAT fees): $50 to $75
• Wire transfers: $25 to $30
• Paper statements: $2 to $5 per month
• Account inactivity: Varies by broker
• Margin calls or forced liquidation: Can be substantial

Spread Costs

The difference between bid and ask prices is a hidden cost on every trade. If a stock has a bid of $50.00 and ask of $50.05, you pay $50.05 to buy but only get $50.00 if you sell immediately. That $0.05 spread is a cost.

Brokers that use payment for order flow may route your orders to market makers who offer wider spreads. On a 1,000 share order, even a penny difference costs you $10.

Foreign Stock Fees

Trading foreign stocks or ADRs often incurs additional fees. These can include foreign transaction fees, ADR custody fees, and currency conversion costs.

Commission-Free vs. Best Execution

The real question is not whether trades are free, but whether you are getting the best overall value. Consider this example:

Broker A charges no commission but routes orders to market makers who give you a slightly worse price. Broker B charges $1 per trade but provides better price execution.

For small trades under 100 shares, Broker A is probably better. For large trades of 1,000+ shares, the better execution at Broker B might save you more than the $1 commission.

Which Brokers Offer Commission-Free Trading?

Almost all major brokers now offer commission-free stock and ETF trading:

• Charles Schwab: Free stocks, ETFs, and mutual funds
• Fidelity: Free stocks and ETFs with excellent execution
• TD Ameritrade (now Schwab): Free stocks and ETFs
• Robinhood: Free stocks, ETFs, options, and crypto
• Webull: Free stocks, ETFs, and options
• E*TRADE: Free stocks and ETFs
• Interactive Brokers: Free tier available (IBKR Lite)

Tips for Commission-Free Trading

1. Compare Total Costs

Look beyond commissions. Compare margin rates, options fees, and any account fees. The cheapest broker for one trader might be expensive for another.

2. Use Limit Orders

Always use limit orders instead of market orders. This ensures you get the price you want and protects against poor execution on wide spreads.

3. Check Execution Quality Reports

Brokers publish reports on their order execution quality. Look for metrics like price improvement and how often you get better than the quoted price.

4. Avoid Overtrading

Just because trades are free does not mean you should trade more. Overtrading is still a losing strategy, even without commissions. Each trade has implicit costs in spreads and potential tax implications.

5. Consider Your Trading Volume

High-volume traders should look at brokers like Interactive Brokers that offer better execution and lower margin rates, even if they charge small fees.

The Bottom Line

Commission-free trading is a genuine benefit for investors. The savings are real, especially for casual investors making occasional trades. However, nothing in the financial world is truly free. Brokers have simply shifted their revenue from direct commissions to other sources.

The best approach is to understand how your broker makes money and whether their business model aligns with your interests. For most individual investors, commission-free trading at a reputable broker is a good deal. Just be aware of the hidden costs and trade accordingly.

Want to learn more about choosing a broker? Read our guide on how to choose a stock broker or learn about payment for order flow.