Technology is making it easier than ever to invest - which is awesome. However, some places still are charging outrageous fees and commissions to buy stocks and ETFs online, when it's possible to buy stocks online for free!
Even some of the firms that advertise "get started with just $5" can end up charging you huge fees as a percentage of what you invest. In fact, we've even seen some really dishonest financial advisors charging thousands!
We've talked about our favorite places to invest for free before, but most of those companies only allow you to invest in mutual funds and ETFs for free. While they have no minimum investment amount (which is awesome), they don't allow you to invest in individual stocks.
For 95% of people, that's fine. We don't recommend most people invest in individual stocks anyway. They should be building a low cost ETF portfolio for the long run. But for those that do what to buy individual stocks, there are still places that allow you to buy stocks online for free. Check it out:
Where To Buy Stocks Online For Free
Right now, there are only a few ways to buy stocks online for free (i.e. commission-free). However, technology is continuing to make investing cheaper, and more companies are fighting each other with lower prices. We should continue to see the cost of buying stocks online drop at most companies over the next few years.
M1 Finance is an awesome new platform that recently unveiled commission free pricing to invest. What that means for you is that you can invest in stocks and ETFs for free - yes $0.
But the great thing about M1 Finance is that they allow you to invest in fractional shares as well - so you don't have to have the price of a full share to invest. This is revolutionary and makes M1 Finance our top choice for places to invest for free.
What makes M1 unique is that you create a "pie", and you invest into this pie. This pie of investments could contain a single stock, or a basket of 100 stocks. When you add money, your money is deposited into your pie to balance it out. This is great for building a long term portfolio - and it's free.
Check out our full review of M1 Finance to learn more.
Robinhood is an app for your phone (both Android and iPhone) that allows you to trade stocks for free. We like Robinhood because it really does allow for free trades - and that's awesome. However, the extent of why we like Robinhood really ends there.
The platform is pretty "no-frills" in what you get. There are limited tools and resources, there is no desktop version, the amount of investments available on the platform are incredibly limited, and even doing basic things like getting you tax form at the end of the year is a challenge. You can read our full Robinhood review here.
However, free is free. According to a TD Ameritrade study, the average "active trader" now trades almost 18 times per year. If you trade 18 times per year at a place that charges a $4.95 commission each time, you're spending $89.10 more per year than someone who invests on Robinhood.
If you're investing a low amount of money, that can add up to a really big savings as a part of your portfolio expenses.
Fidelity is our favorite pick for an online broker for a lot of reasons. Beyond the fact that it's a full service brokerage, allows you to open and use every type of account, every type of investment, and has excellent customer service, they are currently running a promotion that will allow you to invest for free for up to two years.
Fidelity already tops our lists because they offer no minimum IRAs and a large amount of commission free ETFs. They also make it easy to do just about everything, both on mobile and online. They have a lot of locations around the United States as well, should you need professional help. Check out our full Fidelity review here.
What brings them to this list is that they are currently running a promotion that allows you 300 commission free trades, and up to 2 years to use them. So, if you don't take advantage of their many free products, you can still invest for free and buy stocks online for free at Fidelity. That's a great deal. Even after your free trades are up, they have one of the lowest commission rates at just $4.95 per trade.
So, if you're looking for a brokerage to invest with for the long run, we strongly recommend Fidelity.
Vanguard has been a long time favorite of the investing community because they have some of the "best" mutual funds and ETFs at extremely low expense ratios. What this means for you is that you pay a low amount of on-going fees.
However, unless you invested in Vanguard products, you would pay very high commissions to invest - usually $7 but up to $20 if you trade often.
Starting in August 2018, Vanguard will offer more than 1,800 ETFs and Mutual Funds (including the funds from competing companies like Blackrock, Schwab, iShares, etc.) for free!
Now, if you don't want to simply own a Vanguard fund but want other alternatives, you can invest in those for free. Check out our full Vanguard review to learn more.
Partially Free Investing Alternatives
While the options we discussed above are almost truly free ways to invest and buy stocks online, there are some partially free alternatives that are important to mention.
First, check out Stockpile - you can get $5 for free for simply opening an account! That's a huge bonus!
TD Ameritrade offers free investing for a select group of commission-free ETFs. There are currently over 100 free options to choose from, including some very low expense ratio iShares funds.
While not truly free, this offering could allow you to build a great portfolio at a low cost. Plus, TD Ameritrade consistently has some of the best sign up bonuses around. Check out our full TD Ameritrade review.
Charles Schwab is another broker that has a great group of commission-free mutual funds and ETFs to choose from, including some of their own award winning funds.
Once again, while not truly free, the fact that you can build a great portfolio of ETFs for free is a huge benefit. Schwab also consistently has a great sign up bonus, with lower minimums to get the same bonus as other brokers. Check out our full Charles Schwab review.
E*Trade is another major broker that has a great selection of commission-free ETFs and mutual funds to invest in. E*Trade is the only company, outside of Vanguard itself, that allows it's customers to invest in Vanguard funds at no cost (a select group of them).
E*Trade is also not truly free, but it's selection of free funds and investments is great. E*Trade is also one of our top picks for people looking to open a Solo 401k.
Check out our full E*Trade review and see if E*Trade might make sense for you.
WiseBanyan is a different option on this list - they are a Roboadvisor, but they are free. They do have up-sells where you can pay for automation and other things, but their baseline product allows you to invest for free.
Just like other roboadvisors, you setup your account, answer some questions, and WiseBanyan handles the rest. You simply deposit money and don't worry about it. If this is something you're looking for, check out our full WiseBanyan review.
Is There Free Options Trading?
There are a couple different platforms that allow options trading. First, Robinhood, which we talked about above, does allow options trading for free.
Robinhood allows Level 2 self-directed options strategies (buying calls and puts, selling covered calls and puts) as well as Level 3 self-directed options strategies such as fixed-risk spreads (credit spreads, iron condors). Not everyone has access to options trading yet on the Robinhood platform, but full access is expected in 2018.
Another option that isn't totally free, but close, is Jellifin. Jellifin offers unlimited stock and options trading for a monthly flat rate price. Currently, that is $9.99 per month for basic options trading, and $19.99 per month to be able to do more advanced strategies.
Historically, options trading can get expensive - especially since it catered to more advanced traders willing to pay for a platform and easy to use tools. However, with options trading moving to free, it has allowed more people to get in on the advanced tactics that can work well for some savvy investors.
Why Investing For Free Matters
The number one factor that eats away at investment returns is fees. There are a few types of fees:
1. The fees to buy and sell (commission - which we're talking about in this article)
2. The fees to own an investment (expense ratios - which you want to minimize)
3. The fees you pay an advisor
Commissions can play a big role in how profitable your investing can be, especially if you're only trading on a little bit of money. This is why commissions matter in investing. For example, if you're investing $100, and pay a $7 commission - that's the equivalent of losing 7% of your investment on day 1. Given that the stock market returns about 7% on average - you're literally going to be lucky to break even for the entire year!
Even if you're going to be investing $100,000 or more, paying commissions still eats away at your returns. Especially given the fact that there are free options available to invest, why are you still paying?
All that money that you spend on commissions just is tossed away from your own returns. Then, when you combine that with the potential for other, ongoing fees, like the expense ratio on your funds, you can really start losing a lot of money in expenses. That's not good.
In order to maximize your potential profits from investing, you need to minimize expenses like commissions!
How Do These Companies Make Money If They Don't Charge Anything?
This is the first question skeptics ask about these companies that offer commission free investing! How can they possibly continue to exist if they don't charge any money. Even if they have huge venture capital backed investors, the money will eventually run out, right?
I was actually very concerned about this when Robinhood first launched. I spoke with the founder and asked him how he planned to make money - and what if he ran out of funding before he reached scale.
Well, there are more ways for these companies to make money. Here are some of the most popular ways:
- Lending user-owned securities
- Lending user-held cash
- They are paid for transactions in the market
- Interest on margin loans
- Interest on other loans and lending products
- Fees charged for ancillary products and services
The model of these companies is usually run lead, leverage technology, and earn money through other avenues besides charging commissions.
In fact, you can even earn money doing some of these things yourself. For example, lending securities is a common way that stock brokers make money. These securities are what the short sellers borrow when they sell short. Companies like E*Trade allow you to split the lending profits they would earn with them if you allow them to sell your securities. It's an added bonus that you can make some extra money investing with.
Want to make money lending your cash? Check out using a platform like LendingClub that allows you to provide micro-loans to people. You can lend as little as $25 per loan, and get paid back interest and principal each month. It's a great way for you to personally make money lending.
The bottom line is that there are lots of ways for these companies to make money. The names on this list have simply chosen to focus on making money other ways, and not charge commissions directly to their customers.
It's important to remember that fees and expenses is one of the leading reason why investors don't outperform the market over time (after, of course, investment selection).
If you're going to be investing in individual stocks, or mutual funds and ETFs that aren't commission-free, you need to find a broker that allows you to trade for free. Both M1 Finance and Robinhood are potential options. Robinhood is no-frills, but free. M1 Finance is closer to full-service, but doesn't have all the options of a major broker does.
If you're looking for a major broker, we recommend Fidelity or Vanguard. You can also check out our list of the best online stock brokers to find one that meets your criteria.
Let us know your favorite in the comments below!