by InvestorPlace Staff | July 28, 2010 1:04 am
It’s natural to compare online brokers based on their commissions. After all, the whole discount brokerage industry was founded on the principal of lower commissions. But as the number of online brokers has grown, so too has the complexity of pricing.
Indeed, that deeply-discounted flat-rate commission you see advertised on an online broker’s web site isn’t necessarily the one you’ll pay.
And depending on the online broker and the type of trades you make, you may pay far more in fees than you do in commissions.
When the vast majority of brokers quote a flat rate commission, they’re doing so for trades that are executed online.
Those same online brokers will charge higher commissions for automated trades that are done by touch-tone telephone, or broker-assisted trades.
TD Ameritrade, for example, advertises commissions of $9.99 no matter how many shares you buy. But that same trade will set you back $34.99 if use Ameritrade’s automated touch-tone telephone service and $44.99 if you use a broker to help.
An exception: TradeKing charges $4.95 for equity trades, whether executed online or with the assistance of a broker. But TradeKing is not going after investors who want to execute trades with a broker on a regular basis.
“That’s an accommodation we make to our clients out of respect for them,” says TradeKing CEO Don Montanaro. “There are situations where our clients are not able to be in front of a computer. They don’t want to be penalized for that.”
Buying and selling stocks? Fine. You may get the advertised commission (assuming you qualify for it in every other way). But don’t expect that to hold true if you’re buying options, mutual funds or bonds.
Even low-cost leaders like Zecco, charge more for options trading. That’s disappointing for active investors, who tend to be more interested in trading options.
Expect to pay $4.50 plus 50 cents per contract for option trades at Zecco, and option trades do not qualify for Zecco’s 10-free trades-a-month deal.
You’ll find similar price differentials with mutual funds.
But many online brokers do offer a wide selection of no load, no transaction fee mutual funds for which they charge no commissions.
Fidelity, for example, has over 1,400 mutual funds in its no-transaction-fee network. That’s good news if you like the funds in Fidelity’s network.
If not, you’ll have to shell out a hefty $75 to trade mutual funds online, more if you use Fidelity’s automated telephone service or the help of a broker.
The vast majority of commission price quotes from online brokers are for exchange-traded stocks.
Want to buy penny stocks? Some online brokers won’t allow it.
Others, like Wells Fargo and SoGoTrade, simply charge more.
Many online brokers offer their best commission deals to active traders or those with large accounts.
It’s not surprising, since these are clearly the most profitable customers.
But you may need substantial assets—at least $1 million at Fidelity and Schwab—or make a very large number of trades—over 1,500 per quarter at E*trade—to get the best deals.
Be careful not to let the lure of super–low commissions tempt you to trade more than you plan to…
At E*trade, the best price of $6.99 per trade is not much cheaper than the regular price of $12.99, available to any investor no matter how often they trade.
On the other hand, some discount brokers are willing to offer far more substantial cuts in commissions to gain the business of highly valuable customers.
“Whether you prefer to place your orders through one of our experienced registered representatives or online using SiebertNet, we individually negotiate commission arrangements for active investors and those with substantial accounts,” Muriel Siebert advertises right on its web site.
The number of shares you plan to buy can put you into a different commission bracket, too.
Many brokers charge more for trades over 500, 1,000 or 5,000 shares.
Schwab, for example, advertises commissions of $8.95 to $12.95 for online trades (depending on how frequently you trade and how many assets you have with Schwab).
But if that trade is over 1,000 shares, you’ll pay 1.5 cents more for each share over 1,000.
That makes a trade of 5,000 shares cost between $68.95 and $72.95, hardly worthy of being called a discounted commission in today’s marketplace.
Some notable exceptions include Scottrade, TradeKing, Zecco and TD Ameritrade, all of which have flat-rate pricing regardless of the number of shares purchased.
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