Commission-free stock investing may be on the rise, but is it worth getting into? The answer is a resounding yes. However, there are still some things you should know before you try zero-invest commissions.
Below is a guide to free stock investing, its pros and cons, and what you should look for in a zero-commission investing application.
What Does Free Stock Investing Mean?
Free stock investing, also referred to as commission-free stock investing, zero-commission, or no commission investments, is when a stockbroker doesn’t charge a fee for executing an investment in a stock exchange. This is often the case with automated stock investing services, such as Vested Finance.
However, free stock investing does not mean there are no associated fees. If you are investing in an international stock exchange, you will likely have to pay a foreign exchange charge and possibly other charges as well. Remember: while the fees associated with international free stock investments are largely reduced, they are not completely eliminated.
How Do Commission-Free Brokers Make Money?
Many brokers earn their income on the commission fees they collect from investments. So how do commission-free brokers make money? There are several tactics brokers use to build profit, such as:
- Payment for order flow: This is the compensation a broker receives from the market maker who makes the investment. This payment is small, often amounting to fractions of a penny per share sold to the market maker.
- Cash sweep: Brokers automatically transfer a client’s uninvested cash balances into FDIC-insured accounts or into a mutual fund offering. At the end of every month, the broker makes interest or dividend payments to the client. This money also remains available for the client to invest at any moment.
- Stock loan fees: If a client borrows a share, the broker will charge a stock loan fee. The fee’s amount largely depends on the difficulty of borrowing the stock—the higher the difficulty, the higher the stock loan fee.
- Asset management fees: Some zero-commission brokers offer to manage your entire investment portfolio. This includes choosing your investments and investing them according to your specifications. For this level of service, your broker will likely require an asset management fee that deducts a percentage from your earnings.
These fees may or may not be obvious when you sign-up for a zero-commission brokerage account. Make sure you understand your broker’s business practices so you aren’t surprised by any hidden fees.
3 Advantages of Free Stock Investing
There are some obvious benefits of investing with zero-commission, but then there are other benefits you may not have considered, such as:
- Saves your money: Not spending money on commission fees means more of your money is available to invest in stocks. If you’re a new investor or someone who invests in several smaller accounts, this is particularly advantageous—commission fees can really add up when you’re investing several stocks that are only worth a few dollars.
- Encourages you to invest more: Commission fees can act as a deterrent, making you wary of investing in certain stocks simply because of the associated charge. Without commission fees, you are free to take more investment risks.
- Helps make better investment choices: Most free stock investing apps have filters to help you sift through ETFs based on expense ratios, performance, and other metrics. This can encourage better decision-making simply because you have more data.
3 Drawbacks of Free Stock Investing
Free stock investing isn’t completely without downsides. Here are some drawbacks to zero-commission investments you should know:
- Doesn’t include mutual funds: Most zero-commission brokers do not offer investments in mutual funds. However, brokers that do offer mutual funds usually do so without a transaction fee. So while you can’t invest your ETFs and mutual funds from the same app, you can open an account with a mutual fund and still invest without extra fees.
- Tempts some to over-invest: We mentioned that commission fees are often seen as a deterrent, keeping some investors from making investments that “aren’t worth” the fee. But sometimes having a deterrent is be a good thing. Without it, some investors may be tempted to over-invest, which may go against their best interests.
- Some brokers hide extra costs: As previously mentioned, some brokers use other means to make money when they aren’t charging you for commissions. This catch is easy to avoid—work with your broker to verify the fees you are expected to pay.
6 Features to Look For in a Free Stock Investing App
There are a lot of commission-free investing apps available today, but which one should you choose? Here are just a few qualities you should consider when selecting your free stock investment platform:
- Fractional share investing: Purchase stocks based on the dollar amount you want to invest, not the full value of a stock. This allows new investors to take stock in some larger companies, such as Tesla, Apple, Alphabet, or other highly valued companies.
- Flexible withdrawals: While you can only invest your stocks between the stock market’s opening and closing times, you shouldn’t be limited in when you are allowed to withdraw your uninvested money balance. Make sure your brokerage app allows you to withdraw anytime so you have full control of your money.
- Easy account setup: Investinging stocks shouldn’t be difficult. Find an app that lets you set up an account in minutes so you can start investing right when you want to.
- No minimum balance: Some brokerage apps require a minimum investment balance, which may end up being more than you’d like to spend. But with no minimum balances, you can put as much (or as little) as you want into your accounts.
- Encryption security: It shouldn’t be a question of whether or not your stocks are secure. Make sure your brokerage app has encryption security so your stocks and personal information always remain safe.
- US market investment support: If you’re investing from India, ensure your investment app connects you to the US Markets. This will help you break into other markets.
Invest in Zero-Commission Stocks Today
Zero-commission stocks have lowered the barrier to entry for the stock market across the globe. Are you ready to take advantage of this new opportunity? Then make an account with Vested Finance.
Our services can help you break into the U.S. stock market and take advantage of its growth. Start investing today!