Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Zero-Commission ====== Zero-commission trading refers to a [[brokerage]] service model where investors are not charged a direct fee, or //commission//, for executing trades of [[securities]] like [[stocks]], options, or [[ETFs]]. Think of it as the "all-you-can-eat" buffet of the investment world; you can place as many trades as you like without a per-transaction charge. This model was popularized by fintech disruptors like [[Robinhood]] and quickly forced industry giants like [[Charles Schwab]] and [[Fidelity]] to follow suit, making it the new industry standard. On the surface, it's a fantastic deal for the average investor, as it removes a significant cost barrier, especially for those with smaller portfolios. However, as the old saying goes, "There ain't no such thing as a free lunch." While you may not be paying an explicit commission, the broker still needs to make money. Understanding //how// they do this is crucial to being a savvy investor and not just a product for the brokerage to sell. ===== The 'Free Lunch' Illusion ===== So, if you're not paying for the trade, who is? The answer reveals the true business model of most zero-commission brokers. They are not charities; they have simply shifted how they generate revenue, often in ways that are less transparent to the end-user. ==== Payment for Order Flow (PFOF) ==== The biggest secret behind "free" trading is a practice called [[Payment for Order Flow (PFOF)]]. When you place a trade on a zero-commission platform, your broker doesn't typically send it directly to a public exchange like the New York Stock Exchange. Instead, they sell your order to large trading firms, often called [[market makers]] or [[high-frequency trading (HFT)]] firms. These firms pay the broker for the right to execute your trade. Why? Because they can profit from the tiny difference between the buying and selling price of a stock (the [[bid-ask spread]]). While your broker is legally required to seek the [[best execution]] for your trade, this arrangement creates a potential [[conflict of interest]]. The broker might be incentivized to route your order to the market maker who pays them the most, not necessarily the one who gives you the absolute best price. The difference might be fractions of a penny per share, but for high-volume traders, it adds up. ==== Other Revenue Streams ==== Brokers aren't one-trick ponies. They have other ways to monetize their "free" customers: * **Interest on Cash Balances:** That uninvested cash sitting in your account? The broker is likely "sweeping" it into an interest-bearing account and paying you a very low rate (if any), while keeping the difference for itself. * **Margin Lending:** They make significant income by lending money to investors who want to trade on [[margin]] (borrowed funds), charging interest on these loans. * **Premium Subscriptions:** Many platforms offer premium tiers with advanced data, research tools, and other features for a monthly fee. * **Stock Lending:** They may lend out your shares to short-sellers and collect a fee, a portion of which may or may not be shared with you. ===== A Value Investor's Perspective ===== For a value investor, the rise of zero-commission trading is something to be approached with both appreciation and caution. ==== The Good: Lowering Barriers ==== For a disciplined value investor, zero commissions are a net positive. They eliminate a pesky transaction cost that could erode returns over time. This is especially beneficial for investors who: * Are just starting out with a small amount of capital. * Employ strategies like [[dollar-cost averaging]], where they invest a fixed amount of money at regular intervals. Paying a $5 commission on a $100 purchase is a huge 5% drag on your investment from day one. Zero commissions make this strategy far more efficient. ==== The Bad: The Temptation to Tinker ==== The great [[Benjamin Graham]], mentor to [[Warren Buffett]], warned that an investor's chief problem—and even his worst enemy—is likely to be himself. Zero-commission trading amplifies this risk. The platforms are often designed with "gamification" elements—confetti, push notifications, and slick interfaces—that encourage frequent activity. This environment can lure investors into becoming speculators, constantly trading in and out of positions based on noise rather than fundamental value. A true value investor buys a business, not a stock ticker, and holds for the long term. The "free" nature of trading can tempt you to "tinker" with your portfolio, an impulse that almost always leads to worse results. ==== The Ugly: Hidden Costs and Conflicts of Interest ==== While the potential price difference from PFOF might seem trivial for a long-term buy-and-hold investor, the principle matters. The broker's business model is not perfectly aligned with your best interests. Their revenue depends on trading volume and selling your order flow, not on your long-term investment success. This misalignment is a red flag for any prudent investor. You are not just the //customer//; you are part of the //product// being sold. ===== The Capipedia Bottom Line ===== Zero-commission trading is a double-edged sword. It has democratized investing by removing a significant cost, which is a wonderful development. For a disciplined value investor, it's a tool that can be used wisely to build wealth more efficiently. However, **never forget how your broker makes money.** Be aware of the hidden costs and conflicts of interest inherent in the PFOF model. Most importantly, resist the temptation to over-trade that these platforms are designed to encourage. Use the cost savings to stick to your long-term, value-oriented strategy. Your greatest returns will come from patient, fundamental analysis, not from saving a few dollars on a commission while engaging in frenetic, unproductive activity.