Gone are the days of expensive stock broker commissions — or any commissions for that matter — among many online brokerage accounts.
As you look to build wealth through paper assets like stocks and bonds, the first step involves choosing a stock broker. Today you have more affordable options than ever before.
What Is a Stock Broker?
Technically, you can buy or sell stocks without a stock broker. But in today’s world of instant digital trades, automated investing, and commission-free brokerages, it rarely makes sense to go through the hassle to do so.
It’s easier to simply open a brokerage account as a platform for instant trades and monitoring your financial assets. Your brokerage account lets you manage all of your paper assets in one place securely online. Opening a brokerage account is one of the first things you should do as you start saving money.
You can park cash in them as a substitute savings account. You can buy and sell assets at a moment’s notice, set pricing alerts, and in many cases set up automated recurring transfers and investments.
Nearly all brokerage firms offer specialized investing accounts beyond taxable brokerage accounts. That includes retirement accounts like IRAs and Roth IRAs, health savings accounts, education savings accounts and more.
Most cost nothing to open, and you can do so in under five minutes.
Best Online Brokers Offering Commission-Free Trades
So where should you open a brokerage account?
You have plenty of options for commission-free brokers in today’s world. All of the following provide reputable choices, and all are fiercely regulated by the Securities and Exchange Commission.
1. Charles Schwab
I personally use Charles Schwab for my regular brokerage account, my IRA and Roth IRA, and my robo-advisor account. All are free and allow commission-free trades. Plus, you can open a brokerage account with no minimum requirement.
The platform is robust and allows all the features you would expect, from limit and stop-loss trades to customizable email alerts when a stock or fund moves sharply. They offer a range of their own inexpensive index funds for easy, passive investing.
Beyond their in-house funds, they give you commission-free access to thousands of ETFs and mutual funds. Schwab account holders don’t want for selection. Their research functionality is also top-notch, although it can prove slightly confusing for new investors.
I particularly like their robo-advisor service, which costs you nothing at all if you invest at least $5,000. You can set up automated recurring transfers into it to completely automate your investments and trick yourself into saving more money.
I also keep a brokerage account open with Robinhood.
Why? Because Robinhood offers a unique service: the ability to buy and sell cryptocurrencies on its brokerage platform for free. That makes Robinhood far more transparent and safer than private cryptocurrency exchanges, as anyone who remembers Mt. Gox losing $460 million in Bitcoins can appreciate.
Robinhood’s unique cryptocurrency trading isn’t the only reason to use them. They offer commission-free stock, ETF, and option trades; an easy setup process; a fun, retro “Tron”-style mobile app; and a simple, streamlined interface. They also require no account minimum whatsoever.
Unfortunately, Robinhood comes with a few downsides as well. They don’t offer tax-deferred accounts like IRAs. Nor do they offer mutual funds or bonds, which is a dealbreaker for many investors.
3. TD Ameritrade
A classic low-cost brokerage service, TD Ameritrade ranked among the first to jump on the $0 commission bandwagon after Schwab started the trend.
Like Schwab and Robinhood, TD Ameritrade does not require a minimum opening deposit. They charge no commissions on U.S. stock, ETF, or options trades. And their stock and fund research tools rival Schwab’s, all of which investors can use for free.
TD Ameritrade also provides strong customer service for a low-cost brokerage. In addition to 24/7 phone support, they offer support via text, Facebook Messenger, Twitter direct message, Apple Business Chat, and Amazon Alexa.
The only real drawback to TD Ameritrade is their broker-assisted trade fee, which is high at $44.99. Competitors charge $20-30 for this fee, but at the same time, if you want hand-holding and lots of human interaction, you probably shouldn’t choose a low-cost brokerage service in the first place.
4. Ally Invest
Another solid choice for commission-free stock, ETF, and options trades, Ally Invest offers many of the same perks. They don’t require a minimum to open an account, and they offer similarly robust research tools.
In some cases, they even pay you to open an account in the form of cash credits. These vary based on the amount of your opening deposit.
Ally Invest also features a few bells and whistles, like forex and futures trading and comprehensive customer support via phone, chat, and email from 7am to 10pm seven days a week. Even better, they offer a robo-advisor service completely free as well, with no advisory fee or annual charges. And with a minimum investment of only $100, anyone can take advantage of it.
Where Ally Invest falls short in their low-cost mission is mutual funds. They charge $9.95 in commissions for no-load mutual funds, so investors who prefer them to ETFs may want to look elsewhere.
Read our full review of Ally Invest for more information.
Fidelity charges no commissions on stocks, ETFs, or options, and offers more than 3,500 mutual funds with no commission. No minimum opening deposit required.
In particular, Fidelity stands apart for its selection of in-house index funds that charge no expense ratio. Not many of its competitors can claim the same, at least not yet.
Fidelity earns its reputation as a strong research platform, drawing research from 20 third-party data suppliers including Thomson Reuters, Recognia, Ned Davis, and McLean Capital Management.
Long lauded for its customer support and educational resources, Fidelity earns high marks here as well. The company offers 24/7 live phone, chat, and email support, plus over more than physical locations across the U.S. that provide free investing seminars and other support.
If they fall short anywhere, it’s in that their website isn’t always intuitive to use.
6. M1 Finance
Like its competitors, M1 Finance offers $0 commissions and no minimum opening deposit for accounts. However, it functions more as a robo-advisor than a stock broker, albeit one that allows you to pick individual stocks.
One area where M1 Finance shines is in allowing fractional share purchases. For example, say you only have $100 to invest, but you want to invest in a stock trading at $300. M1 Invest allows you to buy just $100 worth of that stock, even though a full share costs more than that.
Its portfolio-building function lets you follow more than 80 expert money managers’ portfolios to mimic or tweak as you see fit. Its robo-advisor service makes it easy to passively model these portfolios.
Investors with strong feelings about social issues will like M1 Finance’s flexibility here. The brokerage offers a range of socially conscious investing options, so you can sleep at night knowing you put your money into companies you can feel good about. These options include environmentally friendly companies, faith-based companies, and other organizations that share specific values with you.
M1 Finance doesn’t offer spectacular customer support, however, with no online chat option. Also, investors don’t have as much control over transaction timing as they do on other platforms.
7. SoFi Invest
SoFi Invest offers several enormous selling points — and several drawbacks.
They charge no commissions and require no minimum opening deposit, which serves new investors well. Like M1 Finance, SoFi Invest allows investors to buy fractional shares.
One nearly unique advantage to SoFi Invest lies in its access to cryptocurrencies. SoFi lets you trade Bitcoin, Ethereum, and Litecoin on its platform commission-free. Unlike Robinhood, which offers additional cryptocurrencies, SoFi Invest only offers these three currencies for now.
Where SoFi Invest really shines is its robo-advisor. One of the few free robo-advisors, SoFi offers a strong feature set at no cost. Even more impressively, SoFi Invest gives its customers 100% free access to human investment advisors. They even provide free career counseling, cementing SoFi Invest as one of the best brokerage and robo-advisor services for young investors.
However, SoFi Invest lacks several core features investors expect. It doesn’t offer fundamental securities like bonds and mutual funds, leaving it woefully incomplete, especially for older adults with different asset allocation needs. Nor does it offer more advanced securities like options, futures, and forex.
As a Silicon Valley newcomer, SoFi Invest also doesn’t have much of a track record. It made its name in the student loans market, not investments, and has only been in business since 2011.
Another newcomer launching even more recently in 2016, Webull best serves the niche of technical traders.
They offer commission-free trades of course, but Webull particularly excels with its analysis tools and real-time market data. These include Bollinger Bands, exponential moving averages, Money Flow Index, and similarly esoteric technical trading indicators.
One nice perk Webull offers is a paper trading account for new investors to practice using dummy money. You can hone your skills with fake trades to familiarize yourself with the platform and the technical indicators, without risking a cent of savings.
If you want diversified long-term investments, you should probably look elsewhere. Webull doesn’t offer bonds, options, or mutual funds, nor do they support OTC Bulletin Board or Pink Sheets stocks (sometimes known as penny stocks).
E*Trade was among the first low-cost online brokerages, and to this day they remain robust and relevant.
Like most players in this space, they charge no commissions and don’t require a minimum investment. E*Trade has you covered with a full suite of securities available, including stocks, bonds, ETFs, mutual funds, options, and futures. That includes more than 4,400 fee-free mutual funds.
E*Trade’s trading platforms and mobile apps rank among the best in the industry. For anyone new to investing, they provide a wealth of free online education, from webinars to articles to online courses.
The brokerage does offer a robo-advisor service, although it comes with a 0.30% advisory fee.
It’s worth noting that in February 2020, Morgan Stanley announced a $13 billion deal to acquire E*Trade, which raises questions about the broker’s future direction.
Understanding Brokerage Fees & Costs
Stock brokerages make money through a wide range of fees and costs. Some are obvious, while others lay hidden.
Before investing, you should always understand the costs you stand to incur.
The most obvious fee that brokers charge is called a commission: the fee to make a trade.
Historically, brokers charged commissions for both buying and selling. If the broker charged a $6.95 commission, and you wanted to buy one share of a stock costing $20, then you’d pay $26.95 total to buy that single stock. That’s hardly an enticing proposition for small trades.
If you bought 1,000 of those $20 shares, then you’d pay $20,006.95 — a far more efficient transaction from a fee perspective. But that hardly comforts a new investor with little money to invest, who incurs a flat fee on every small trade.
But in 2019, Charles Schwab announced the elimination of all commissions on U.S. stocks and funds. Their competitors in the low-cost online brokerage industry followed suit, including E*Trade, TD Ameritrade, and Fidelity.
That makes it technically free to buy or sell these stocks, and levels the playing field for both entry-level and wealthy investors to buy and sell in any amounts. It also makes it far easier to earn a profit day trading.
It also makes it easier to dollar-cost average, a strategy for reducing risk that involves making recurring investments at regular intervals. For example, you invest in the same index funds every two weeks automatically, buying shares in small increments. These small, frequent investments are much more efficient without having to pay commissions.
One downside to commission-free investing is that it “encourages bad behavior,” such as frequent trading and emotional investing. For better or worse, Americans find themselves largely responsible for their own investments, but many don’t have the knowledge or discipline to avoid emotional investing mistakes like panic selling.
Fund Expense Ratios
Many brokerages offer their own mutual funds and ETFs, both managed and passive. And nearly all funds charge an annual expense ratio.
That expense ratio is an annual percentage fee, based on the amount that you own. If the expense ratio is 0.5%, for example, and you own $10,000 in shares, then you’d lose $50 in expense ratio fees to that fund each year.
Even so, expense ratios have trended downward in recent years, given the rise in popularity among passive index funds. Some brokerages go so far as to offer index funds with 0.0% expense ratios.
Many brokerages offer robo-advisor services, which recommend a certain asset allocation based on your age, long-term goals, risk tolerance, and other personal financial factors. Once you approve their recommended division of assets, they invest your money automatically for you, and rebalance your portfolio as needed.
Some even optimize your portfolio for tax purposes by tax-loss harvesting.
Although some robo-advisors cost a pretty penny, others remain free, or charge a low-fee relative to human investment advisors. Generally speaking, the fee varies based on the flexibility of the robo-advisor service and your access to human advisors.
The problem with this trend toward free brokerage services is that brokerages don’t just roll over and accept lower profit margins. They make up that revenue elsewhere.
Unfortunately, “elsewhere” usually involves less transparent means. At least commissions, expense ratios, and robo-advisor fees are publicly stated. But brokerages have a few tricks up their sleeves.
One way that brokerages earn money is through bid/ask spreads: the difference between what you can buy and sell a stock for. Part of that spread goes to the market maker for facilitating the transaction. As brokerages feel the pinch elsewhere, they may look to widen those spreads.
Brokerages also make money by investing your cash balances for their own gain. Many intentionally pay little on money market accounts and make it cumbersome to move money in and out, so fewer investors bother with them and simply keep more cash in their account. They then sweep that cash balance into low-risk money market funds where they earn a return on it.
Finally, brokerages earn money on margin accounts, where they lend investors extra money to invest — for steep interest. They may charge even more moving forward to shore up their balance sheets.
If you don’t have a brokerage account, open one. A few of the absolute best commission-free brokerage services above include Charles Schwab, TD Ameritrade, and Fidelity.
If you plan to use the platform more for its robo-advisor service, SoFi Invest and Ally Invest both offer strong alternatives.
Whatever you do, don’t let your life savings sit idly in a savings account. Remember the NYU study above? If you invested $100 in 1928 in the S&P 500, you’d have half a million dollars today. If you left it in cash, you’d still have a whopping $100.
Do you currently use a stock broker? Are you considering changing brokers? Who do you use, and why?