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    How to make the most of a zero-commission world


    November 14, 2019

    By Beth Pinsker

    NEW YORK (Reuters) – How interested are people in trading stocks for free?

    Very.

    In early October, after TD Ameritrade announced it was switching to zero commissions from $6.9 on most trades, client call volume increased 20% and new client call volume shot up 40%, the company said.

    But that does not mean that there is a whole new cadre of day traders swapping exchange-traded funds every hour, even as the likes of E-Trade, Fidelity and Schwab joined the fray to offer zero commissions.

    At Schwab, trading volume actually decreased in October, according to the company.

    “We see zero commissions as a way to provide access and lower friction to people who want to buy in a brokerage account or elsewhere. We don’t think people will trade actively,” said Rob Williams, vice president of financial planning at Charles Schwab and a certified financial planner.

    As investors wade cautiously into this new world of free trading, here is how to make the most of it as well as what to avoid:

    *Retirement accounts

    Zero commissions will not make much difference in workplace 401(k) plans (or your college savings 529 account), which heavily favor target-date mutual funds that you typically set once and do not trade again until you cash out.

    But you could change the way you deal with the existing balance in your rollover individual retirement account (IRA) or Roth IRA, and any new contributions you make, where clients lean more toward low-cost index ETFs.

    If you are a once-a-year contributor, you might want to think about stretching that out – known as dollar-cost averaging – so you are not dependent on how the market is doing on any one particular day.

    “I think this is a great opportunity for those folks to dollar-cost-average and invest in smaller increments and get involved in stocks that you might not have gotten involved in before,” said Josh Rowe-Heupler, general manager of investing for LendingTree.

    You can also save money rebalancing, which you need to do if market forces sway your portfolio away from your long-term goals.

    At the investment management firm Rebalance, clients are saving about $35 a pop for twice yearly rebalancing, said Mitch Tuchman, managing director and chief investment officer.

    “The end of commission marks the end of a conflicted way of doing business that has been in place since the beginning of the stock market. We can now put a stake in the ground and say it’s dead,” Tuchman said.

    * Investing small amounts

    Before October, if you had $100 to save, your options were not good for investing because even a $4.95 transaction fee would eat significantly into your potential returns. You might be discouraged from doing positive things, like saving in your triple-tax-free Health Savings Account or putting just a little bit of money into a Roth IRA.

    “Many times customers don’t realize that they leave their money in cash for a long time – longer than they think,” said Ram Subramaniam, president of Fidelity Brokerage Services, where cash in brokerage accounts earns 1.33% at the moment. “One of the first do’s is to make sure whatever cash you have works for you.”

    * Emergency funds

    Not all cash is meant to be invested, however.

    “It’s very prudent to have emergency funds,” said Steve Quirk, vice president of trading and education at TD Ameritrade. But, that said, investors know how little interest they earn on cash. When they see the S&P 500 up more than 20% for the year, they want to participate in that.

    “Now you can, at least in a portion,” Quirk said, because with ETFs you can get in and out in milliseconds for no cost.

    As for those who worry about investors hooked on trading, Quirk draws the analogy with exercising: “If health clubs were suddenly free, are we nervous that people will overexercise? You just have to do it in a prudent manner.”

    (The story corrects that ‘most’ trades are free instead of ‘all in the 3rd paragraph.)

    (Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance; Editing by Lauren Young and Jonathan Oatis)

    Link to original article here.
    Last edited by james.hendrickson; 12-02-2019, 08:15 AM.
    james.c.hendrickson@gmail.com
    202.468.6043

    #2
    I don't think the gym analogy is a good one, but otherwise interesting article. I've wondered if zero commissions would lead people to trade more. It definitely helps with investing smaller amounts because you aren't losing a big percentage to commissions. Of course, that very same fact could result in people being more willing to trade.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      http://nymag.com/intelligencer/2019/...the-catch.html

      The zero commission item may not lead to more trades simply because people are often hesitant of why did they drop price to zero. Some are wary of what is the catch certainly these guys have a plan they are not cutting their own income.
      This link explains that most of their money is/ was made from them steering investments to items that work for the company more then the client. New investors are probably easier to convince to hold into cash cows for the investment companies.

      Comment


        #4
        Originally posted by Smallsteps View Post
        http://nymag.com/intelligencer/2019/...the-catch.html

        The zero commission item may not lead to more trades simply because people are often hesitant of why did they drop price to zero. Some are wary of what is the catch certainly these guys have a plan they are not cutting their own income.
        This link explains that most of their money is/ was made from them steering investments to items that work for the company more then the client. New investors are probably easier to convince to hold into cash cows for the investment companies.
        Also - Schwab makes money on interest arbitrage. Schwab pays about .27% interest to its customers but can borrow against its customer's cash holdings at 2.3% or thereabouts.
        james.c.hendrickson@gmail.com
        202.468.6043

        Comment


          #5
          Originally posted by james.hendrickson View Post

          Also - Schwab makes money on interest arbitrage. Schwab pays about .27% interest to its customers but can borrow against its customer's cash holdings at 2.3% or thereabouts.
          Yes, that's exactly what the article talked about.

          The brokerages will lose income from eliminating commissions. No way around that. But their hope, obviously, is that it pulls in new clients who use other services that aren't free. Then there are also economies of scale which is why Schwab is buying TD Ameritrade.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment


            #6
            Originally posted by disneysteve View Post

            Yes, that's exactly what the article talked about.

            The brokerages will lose income from eliminating commissions. No way around that. But their hope, obviously, is that it pulls in new clients who use other services that aren't free. Then there are also economies of scale which is why Schwab is buying TD Ameritrade.
            Or they may end up making more...from the market makers...with the customer still paying, but in a less direct way, on the spread?
            Anyway … I'm going to stick to NOT trading individual stocks.

            Quarterly information regarding the routing of orders in listed equities, OTC equities, and listed options.

            Comment


              #7
              Originally posted by scfr View Post
              Or they may end up making more...from the market makers...with the customer still paying, but in a less direct way, on the spread?
              Anyway … I'm going to stick to NOT trading individual stocks.
              It is a good way to put it "paying in a less direct way".
              I look around me and see it everywhere.
              I read an article about an Esty Business owner who started to lose sales as she did not have " free" shipping so the Esty group told her to just raise her prices to make her shipping "free". same with buy x amount as people all expect Free shipping but it is built in cost so you are paying in a less direct way.

              Makes me giggle when so many people say they want transparency in things but then so many others are fighting it why? ....... when the curtain is pulled back people will see they have been paying all along " in a less direct way" .....

              Comment


                #8
                Originally posted by Smallsteps View Post
                I read an article about an Esty Business owner who started to lose sales as she did not have " free" shipping so the Esty group told her to just raise her prices to make her shipping "free".
                That drives me nuts. The same thing happened on Ebay. I used to charge actual shipping costs, to the penny. My exact cost. I had buyers complain that I was overcharging for shipping. Ebay started pushing the whole "free shipping" nonsense so everybody started to expect a flat all-inclusive price. Does it really matter if you pay $10 plus $5 shipping or pay $15 with "free" shipping"?

                Of course, Amazon is probably behind much of that since they were the first major place to actually give free shipping with a $25 order. Not only were their prices typically lower than stores but they also shipped you the stuff at no added cost.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                  #9
                  Originally posted by disneysteve View Post
                  Of course, Amazon is probably behind much of that since they were the first major place to actually give free shipping with a $25 order. Not only were their prices typically lower than stores but they also shipped you the stuff at no added cost.
                  how long until their loss leaders to gain where they are at disappear? "free" shipping and replacing so many lost/ stolen etc packages?

                  I read an report that in NYC alone 90,000 packages a day are going missing.
                  There are some enterprising retirees who for a fee accept all package for a building for example and even local bodegas becoming a package holder of sorts to combat the "missing" shipments.
                  so you get "free" speedy shipments only to pay a fee to a person to protect your item.

                  Comment

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