Commission-free trading of stocks, return funds, and options were introduced by JPMorgan Chase & Co. The talk of a race to zero grew louder as another brokerage introduced a service that provided free trading. Individual investors should rejoice in this development.

Online brokerages now offer "free" trading, but restrictions on what may be traded exist. Consider each platform's offer before making a final decision. For example, free stock trading may be limited to a certain amount of trades per month, but mutual funds and ETFs may still be charged.

The Big Names of No-Fee Trading

Merrill Edge, ETRADE, TD Bank, Robinhood, and SoFi are just a few large brands that will provide free trading choices in early 2021. Additionally, Vanguard, Fidelity, & Charles Schwab have systems in place for their clients to use. Despite its marketing focus on worldwide markets, Interactive Brokers does not provide no-fee trading in US stocks.

About You Invest

This is the newest of the bunch, launching commission-free trading in 2019. Before this change, only Chase clients were eligible for the no-cost swapping offer. So, what's the big deal here? Regarding the stock, option, and ETF trading, Merrill Edge already had an established commission-free scheme. 2 Despite Robinhood's app being free to use, its analytical skills are near-nonexistent. 3 To close a position, you do not have to pay Tastyworks a commission.

Competition's Reaction

Online brokerage executives were asked about the impact of You Invest's debut and whether or not they felt the need to reply with a new promotion of their own. "I believe rates are as low as they can go until internet enterprises 1) stop delivering streaming data, 2) stop inventing software," said Tastyworks' Tom Sosnoff. The trading desk should no longer assist clients. 4) halt the flow of information. "It's a terrible trade-off," he says. Fidelity noted in a statement released in response to JPMorgan's original announcement that "that investor should carefully consider the value of a brokerage firm's services

Beyond Price

Only later were options and mutual funds added to You Invest, which had initially only permitted trading in US equities and exchange-traded funds. A small portion of the assets are available to retail traders, yet they're the most popular among individual investors. If you currently have a Chase account, signing up for a new one is a breeze.

The Chase credit card information is enough to complete the application process. You may have to wait one business day for a You Invest account to be accepted, which is unusual for an online brokerage. The website and app are simple to use after logging in.

How Are Brokers Able To Afford This?

At this point, it is natural to ask how brokers can afford to do this while still making a profit. The real question is, how can they afford not to? It has been years since commissions have been reduced, with one broker leading the way and others following suit. Nobody is ready to risk losing customers to their competitors by keeping prices higher than their competitors.

The effect is multiplied dramatically when the industry reaches the elusive number zero. On the other hand, commissions may be less critical to other brokers since they have alternative options to compensate for the revenue loss. Schwab is a good illustration of this. Trading income accounted for only 8% of total revenue in 2018, down from 15% in 2014. Asset management accounted for 32 percent of the company's revenue, while interest income from client funds accounted for 57 percent.

The Cons of "Free" Trading

"Free" deals from any source are a red flag. In other words, don't expect anything for free. Inevitably, you will pay a lower-than-expected price for your trades since the broker must earn a profit somewhere. By paying for the order flow through market makers, brokers can provide free transactions without prioritizing the best prices.

According to Steve Sanders, if you don't do your study, brokers that offer "free or inexpensive transactions" are raking in the dough by charging high borrowing costs to those who don't conduct their due diligence." When idle cash balances remain, Interactive Brokers pays 1.42 percent, costs 3.42 percent or less for borrowing, and provides a wide range of securities from around the world at cheap commissions, and he points out.

Keep in mind that brokers will find alternative ways of making money when commissions decrease. Zero-commission brokers make money off of unused funds in customer accounts. Lending securities to short sellers and retaining the loan profits is another way they generate cash.

Bottom Line

Investors may reap the benefits of the industry's current initiative to reduce charges, provided they don't allow it to hinder their trading and instead invest the savings. However, interest rates continue to rise, and investors should ensure they're managing surplus cash in their brokerage accounts and optimizing their profits, even as commissions reduce.