Free stock trades are becoming increasingly common, and eliminating commissions is an attractive move for investors. But before you start trading for free, it’s important to understand how these free brokerages make money and what advantages and disadvantages they come with. At the end, I’ll highlight three of our top rated free stock brokers.
How Do Free Stock Brokers Work?
Free stock brokers work just like any other stock brokerage. Transfer money into your trading account, then place real-time stock trades for most publicly traded US stocks. You can buy and sell at will.
The main difference you’ll notice between free stock brokers and traditional stock brokers is the amount of additional features you have available. Most free stock brokers offer real-time stock quotes but there’s very little in the way of advanced fundamental data, technical charting, or real-time stock news. While you might find algorithm-driven suggestions for stocks to explore, you also probably won’t get stock recommendations from analysts like many discount brokerages provide.
The other big difference between free stock brokers and traditional brokers is the types of trades you can make. Free stock brokers are largely limited to trading stocks and ETFs, although Robinhood now offers limited options trading as well. At least for now, free stock brokers aren’t offering trading on commodities, mutual funds, or most currencies.
How Do Free Stock Brokers Make Money?
In reality, commissions are only a small fraction of how most discount stock brokerages make money. So, free stock brokers aren’t losing out on as much money as it may initially seem.
The first way in which free stock brokers make money is through net interest income. When you hold money with a free stock brokerage in a cash account, the brokerage is actually investing that money in a low-risk security, bond, or treasury. Even if the brokerage is paying you some interest on your cash – maybe one or two percent – they’re probably earning more than that through their investment. The difference is called net interest income, and it’s a major source of profit for free stock brokers.
The second way in which free stock brokers make money is through payment for order flow. When you place a trade, that order is routed through an internalizer – essentially a company that specializes in high-frequency trading to take advantage of arbitrage in stock prices between markets. This arbitrage is lucrative enough that internalizers pay brokers a commission in order to route its orders through them. While this is a minor source of income for traditional discount brokers that charge commissions, it can make up more than half of free stock brokers’ revenues.
Pros and Cons of Free Stock Brokers
The main advantage of free stock brokers is obvious – you can place stock trades commission-free. There really aren’t hidden fees with most brokers as long as you place basic stock trades. For many traders, that’s enough to outweigh the slight disadvantages of these platforms.
The first notable disadvantage to these platforms is that most of them don’t offer any interest at all on your cash accounts. So, if you hold a lot of money in cash for long periods with a free stock broker, you lose out on the several percent interest that you’d get from a money market account at a traditional brokerage. Still, since trades are free, it’s easy enough to keep your money in low-risk ETFs most of the time rather than cash.
The second big disadvantage to free stock brokers is that you miss out on the tools that traditional stock brokers offer. This includes technical charting, fundamental data, real-time stock news, and stock recommendations. However, there are a variety of free sources available to replace almost anything you could get from a discount stock brokerage. So, at the end of the day, the only downside is having to navigate multiple platforms.
The final disadvantage is that the free trading brokers limit what you can trade. Again, though, it’s easy enough to do most or all of your stock trading in a free platform and most of your options, commodity, or forex trading with a traditional brokerage. The downside is that with your money on different platforms, you’ll lose some liquidity as transfers typically take up to a few days.
Our Top-rated Free Stock Brokers
Overall, the advantage of commission-free trading far outweighs the slight disadvantages to free brokerages for a lot of traders. So, let’s take a closer look at our three top-rated free stock brokers: Webull, Fair-trade, and Robinhood.
Webull
Webull is a popular free stock broker because it offers some of the more advanced tools of any of these platforms. Included in the platform are up-to-date stock news and basic technical and fundamental analysis tools. In particular, the charts are much more advanced than what you’ll find in most other free stock trading apps. Another advantage to Webull is that the platform offers trading outside of standard market hours, from 4 am to 8 pm.
Webull doesn’t have a minimum account balance to get started trading, and you can trade most US stocks and ETFs. If you want to trade on margin, you’ll need to have at least $2,000 in your account.
Freetrade
Freetrade is a free stock broker based in the UK, offering trading on most stocks on the London Stock Exchange as well as a handful of major US stocks and ETFs. Unlike for Webull, free trading doesn’t occur in real-time. Instead, orders are processed in bulk at the end of the trading day. That means that when you place a free trade, you need to choose whether or not to put a limit on it in case the price rises.
Real-time trades with Freetrade are cheap, but not free – you’ll pay £1 per real-time trade. At this time, Freetrade does not offer trading of any other financial products, and the list of US stocks available to trade remains relatively limited. There is also currently no margin trading with Freetrade.
As for other free stock brokers, the tools around trading are limited. While there are basic charts, you cannot add technical overlays and it’s difficult to investigate price history for a particular stock. Freetrade also doesn’t offer stock news, instead offering an algorithm-driven “Discover” page in its app.
Robinhood
Robinhood is the original free stock broker, and it’s enormously popular. In addition to offering stock trading, Robinhood offers limited option trading (long calls and puts only) and Bitcoin trading. The platform doesn’t have any account minimum for long trading.
Trading with Robinhood is free, but users also have the option to sign up for Robinhood Gold for $5 per month. With a Gold subscription, investors are eligible to trade on margin as long as they have at least $2,000 in their accounts. On top of that, the first $1,000 of margin is interest-free, and margin rates are only 5% after that. The other big advantages to Robinhood Gold are instant deposits to and withdrawals from your brokerage account and access to trade outside of standard market hours.
The downside to Robinhood is that the platform has very few analysis tools. Charts don’t have axes, let alone technical overlays. While Robinhood does provide some basic stock news, news usually comes hours after the stories are first broken.
Are Free Stock Brokers Right for You?
Using a free stock broker can save you money on commissions, especially if you’re primarily trading US stocks and ETFs. While these brokerages do have some disadvantages compared to traditional stock brokers, they truly are free to use and most of the drawbacks can be navigated by supplementing with other free trading tools. If you do want to try out free stock brokers, we highly recommend checking out Webull or Robinhood.
