‘Free’ Stock Trading Has Its Own Price Over Time

BY STEVE DINNEN

Remember the good old days of stock trading, when you would pay a commission of $100 or more to buy a stock, and then an equal amount to sell it? That stock might have to rise double digits just so your broker could get paid.

In recent years we have moved toward discounts, to a price of just $6.95 per trade, or even $4.95. And then we arrive at today, when most brokers have cut the commission rate to zero. You pay nothing to buy, nothing to sell. Just about every securities trading firm has adopted this model.

But is it a good idea? Well, it certainly takes trading fees off the table as a discussion point (the same with wrap fees, by the way). But it also frees up investors to day trade. And for most of us, study after study has shown that this is not a good way to make money. Buy and hold is a better strategy, both because it tends to produce better returns and because it moves you from a short-term to long-term capital gains income tax treatment.

There also is a worry that, once fees are no longer generated for trading firms, they will try to make up for this lost income some other way. That hasn’t been the case yet. As the securities industry continues to evolve, more and more players are even sweeping uninvested cash into money market accounts, which don’t pay a great deal of money but certainly don’t rack up those $100 dings.

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