Why I Don’t Care About Free Stock Trades (And You Shouldn’t Either)

With the rise of free trades on more and more online brokerages comes a new batch of investors learning the ropes. This article focuses on what new investors should be on the lookout for.

Written by Adam on 2019-10-29. Minafi, Blog, Investing, Canonical. 2 comments. Find out how I make money.

The first time I ever traded stocks was in the sixth grade. We scoured newspapers and invested fake money into real companies that we thought would grow in value. We tracked their progress over the coming months and learned if our investments gained or lost value.

This is the introduction many kids get to the stock market – if they have any introduction at all. It’s about picking companies with limited information and hoping that it pays off. Even this activity helped to understand how investing works, albeit with some gaping problems. Unfortunately, this isn’t the way that most people should invest!

Fast forward a few years and I have started to earn a little bit of money while in my last year of college. It was only a few hundred dollars, but it was something! I thoroughly researched investment platforms and found out that I might have to pay $12 just to invest $100! If I wanted to diversify my position and invest in 2 things, that jumps to $24. That’s 24% of my investment lost to fees.

Eventually, I went with a (now closed) site called Sharebuilder that allowed me to make 10 automated, not-executed immediately trades a month for $12 or so (I can’t remember the exact details) if you choose from their available ETFs. It ended up being way cheaper than anything else and that drew me in.

Today I know most of these sites have absolutely crazy fees – Sharebuilder being one of the better ones for the time. For those like me that learned “investing in the stock market” meant “buying individual stocks”, we were unknowingly set up to fail at investing.

The Rise of No-Fee Stock Trading Platforms

A decade ago if you wanted to invest in a single stock you’d either have to pay a trade fee of $4 – $12 or have enough money in an account that an online broker allowed you trade for less.

Even at Vanguard if you invest in an online stock you’ll pay up to $7 per stock trade. (note: If you have over $1m at Vanguard you get 25 free trades a month!).

Vanguard stock trade prices

A few years ago, Robin Hood launched with a key difference from all other stock trading platforms – you paid $0 per trade with a $0 minimum account balance. For people new in investing, this was huge! You could put in as little money as you wanted and immediately invest it for free. This was suddenly cheaper than any other platform out there and let a whole new group of people make their very first investments.

The other online brokerages have taken notice. Over the course of the last year, we’ve seen one after another cave and start offering free trades just to be competitive. This follows the trend of a few decades ago when you needed to pay just to have a checking account. We’re still in the middle of this migration, but many online brokers have always adjusted their business models to support free trades.

Trade Fee Account Minimum Trade Fee
mutual funds)
Ally Invest $0 $0 NA
Ameritrade $0 $0 NA
Charles Schwab $0 $0 $0
E-Trade $0 $0 NA
Fidelity $0 $0 $0
Interactive Brokers $0 $0 NA
Robin Hood $0 $0 NA
Vanguard $7 ($0 for $1m+) $0 $0

Every week more and more platforms are moving towards a “free” model for trades. If all I knew about investing was this chart, there’s no way in hell I’d choose Vanguard (more on this later).

There’s a lot more to investing than just these fees! For one, these are stock trade fees, not mutual fund trade fees.

What I didn’t know when I started investing, and what many many people who use the above platforms don’t know is that it’s always been free to buy mutual funds from the company that sells them! At Fidelity, Vanguard, Charles Schwab and many others you can buy mutual funds from that company for $0, and you always have been able to. The only downside is that there’s often a minimum account balance needed – $3,000 in Vanguards case.

So, how do you know if you should invest in stocks, ETFs or mutual funds? For one, ETFs and Mutual Funds are basically the same. The only reason I see to invest in ETFs over Mutual funds is if you don’t have enough to reach the minimum account balance need for a mutual fund. Once you reach it, you could switch to mutual funds at that point.

For mutual funds vs stocks though, I have a strong opinion on this one:

The vast majority of people should only invest in mutual funds (or ETFs if their 401k account only supports those).

My investing style discussed in The Minimal Investor

Yes, that probably means you too. I wouldn’t even think about investing in individual stocks until you have at least $100,000 saved up and invested in ETFs/Mutual Funds. At that point, you could try dipping your toe in stock market investing with a small amount – say 5% of your total portfolio.

Even with over $2m saved up, I still limit how much I invest in individual stocks to 5% of my total portfolio! This is the riskiest and most volatile part of everything I invest in. It’s also a small enough amount that if it went to zero it wouldn’t bankrupt me.

Free Isn’t Really Free

I hope that by now you’re strongly reconsidering investing in stocks. If not, here are a few more reasons why ETFs/Mutual Funds are the way to go.

You shouldn’t trade more just because it’s free. Attempting to time the market is a loser’s game. You have to be right twice for it to work – once when you buy and again when you sell. Having the ability to buy and sell at any time may cause you to feel like you’re in control of the situation – but you’re not! You can’t control the market, and you can’t reliably anticipate whether your timing is right. You may make some good trades, but it’s impossible to make a good trade every time. Even if you’re Warren Buffett, you’re going to pick some losers. Just make sure those mistakes are with a small enough portion of your investments to not cause trouble.

Trading more means paying more taxes. If you’re investing in an after-tax account (outside of an IRA/401k), then you’ll need to pay taxes each time you sell a fund for a gain. The amount you’ll pay in taxes will be determined based on how long you’ve held that fund. If you hold it for more than a year you’ll pay taxes based on the long-term capital gains rate (shown below). If you hold the fund less than a year then you’re on the hook for paying taxes based on your ordinary-income rate. You’ll pay more in taxes on your stock trades if you make over $38k (individual) or $77k (filing jointly). In other words – taxes are likely going to be higher if you hold for less than a year.

Rate Filing Married Individual Rate
0% $0 - $78,750 $0 - $39,375
15% $78,750 - $488,850 $39,375 - $434,550
20% $488,850+ $434,550+

Platforms sell your trade activity to make money. When you click “buy” or “sell” on an online broker, a lot happens behind the scenes. In the ideal case, your broker will match your “buy order” with the lowest priced “sell order” out there on the open market. This guarantees that you’ll get the best price possible. Not all brokerages do this though. Some will first send your trade intention to a 3rd party, for which they get a small commission. That 3rd party can then (if their algorithm wants) buy or sell that stock before your trade executes. These brokers are giving someone else a chance to cut you in line!

This is one of the ways Robin Hood has managed to stay “free” while still making money. It also means that their customers aren’t getting the best possible deal for their trades. It may only mean a cent here or there for you, but for Robin Hood, selling this information adds up.

Platforms lock-in makes it easier for them to sell you expensive products. Have you ever heard the term “loss-leader”? The definition is simple:

Loss-Leader, noun, a product sold at a loss to attract customers.

Companies have used this strategy forever – putting items on sale, happy hour at bars, buy-one-get-one-free gimmicks, and rotisserie chickens at Costco (mmmm).

For most online brokerages, they have two loss leaders: free stock trades and a super-cheap index fund (or two). Just like the delicious chickens, these are both great deals! The problem comes when you start also buying other products from these providers. If you start using a brokerage, you’re more likely to also use them as your advisor (1% fee), buy an expensive actively managed fund (1%+ expense ratio), or start buying more complex securities (buying shorts, limit orders or other addons). Each of these puts more of your money in their hands.

In other words, brokerages offering these services are like Las Vegas hotels giving you a free night stay. Be careful what you do while you’re there.

Most People Shouldn’t Invest in Stocks

If there’s one reason not to be excited about free stock trades it’s this one: you don’t need to invest in stocks to get rich and retire early.

This goes back to why a diversified portfolio is better than a heavily weighted one. If you invest in just one stock, then you’re hitching yourself to their wagon. They might have a great quarter, or they might get hit with some regulatory action that causes them to drop in value. They may have social media blunder or an environmental disaster. All of which are completely outside of your control.

But what if instead of investing in one stock you invest in 3,264 stocks? That’s the power of investing in an index fund like $VTSAX, which puts a small amount of your money in that many publicly traded companies. You own a small amount of Microsoft, Amazon, Apple, Google, Facebook and thousands of others. The added bonus? You can already invest in them for free without needing to pay a trade commission!

How do you do it? Wherever you’re investing there’s like a low-fee, diversified, US Index fund. If you’re investing Vanguard, Fidelity or Schwab this will likely be in the form of a mutual fund. If you’re investing elsewhere it might be an ETF (for example $VTI).

I invest over at Vanguard, but just about every investing platform or 401(k) offers a similar fund to put your money. If you’re looking to get started and learn how to invest in this way, I have a free course that shows exactly how to do it.

Investing in individual stocks can be exciting – there’s no denying that! It’s the same feeling as buying a lottery ticket or putting your money down in a casino. There’s a chance you’ll win big and get rich! Investing in index funds may not give that same adrenaline rush, but the sense of security to being diversified is hard to beat. If you long for that rush, putting 5% of your portfolio into individual stocks is a great way to balance risk with reward.

If you’re just getting started investing and have only tried investing in individual stocks, I encourage you to give index funds a shot!


Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!


Why not add to the conversation below? Your voice is welcome!
Costa Rica FIRE

Costa Rica FIRE

November 20, 2019

Agree 100% that the vast majority are better off in mutual funds or diversified ETFs. However, if you’re interested in ETFs, these would need to be purchased via a brokerage account and in the past there would have been fees but no longer. That small benefit is outweighed by the possible temptation to trade more, but for the disciplined, the reduction in trading fees is a benefit. If the reduction in fees encourages you to rebalance a diversified ETF portfolio more regularly, that is another benefit — with the recent market run-up, portfolios may be overweighted in stocks. Our household is strictly in mutual funds but we did have to rebalance recently to keep our US v international target and our growth v. value v. cash target as well.

Good point! Using the free trades to rebalance in an expense-optimized portfolio could save a few bucks. It could save even more if it encourages you to rebalance more often in a tax-advantaged portfolio for sure.

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