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How to Choose an Online Discount Broker – Part 4 – Commission Pricing I

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March 14, 2012

Published March 14, 2012 01:32 PM

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    Key points

    One of the first places that retail investors look to when thinking about choosing a discount brokerage firm is commission pricing. Pricing, however, isn’t as straight forward as the lowest price commission per trade.  When thinking about pricing, value is really what you as a potential or existing client are seeking.  After all, if you […]

    One of the first places that retail investors look to when thinking about choosing a discount brokerage firm is commission pricing. Pricing, however, isn’t as straight forward as the lowest price commission per trade.  When thinking about pricing, value is really what you as a potential or existing client are seeking.  After all, if you need or want timely service, fast order execution time, a great trading platform or educational resources, all of those components change what you would be willing to pay.   With all of the options in a very crowded discount brokerage market, how can you meaningfully compare apples to apples?

    Even though there are many different parts to consider when choosing the best online discount broker for you, this series of articles focuses on understanding commission pricing as that is one of the major marketing messages sent to consumers.

    One helpful way is to understand that being a brokerage firm is a business, and like any other business, brokerages are in it to make money.  Their “business” is providing access to the stock market – they facilitate investors/traders being able to exchange financial products in a market.  As such , discount brokerages make their money on trading activity, and do so in one of the following three ways:

    1. a fee per order (regardless of the number shares traded per order) or a
    2. fee per volume of shares traded, or a
    3. hybrid of fee per order and fee per volume

    The fee that you get charged per order or per volume can also depend on the price of the stock – i.e. is the price above or below a certain level.  Currently that ‘threshold’ is a stock price of between $1-$2, depending on the discount broker.  So, to summarize, the way in which commission price is determined can be: the number of orders you make, the size of the orders (in shares) you make and/or the price of the stock you are buying/selling.

    Therefore when thinking of pricing it makes sense to really understand your trading/investing style and level.  To make matters tricky, there is no set “definition” of an “active” trader. Each discount broker has a different threshold of what constitutes active or not.  The current range to qualify for “active” trader status (and therefore discounted pricing) goes from a minimum of 9 trades per quarter (OptionsXpress) to 150 (iTrade, TD Waterhouse, Qtrade, RBC Direct Investing).   If it sounds a bit complicated, it can be. Luckily our broker comparison table helps to compare discount brokerages a snap because we’ve put all of those pieces side by side.

    In the next section on pricing, we will take a closer look at the commission pricing options of “flat-fee” pricing, standard pricing and “range pricing”.  We’ll also share some tips on ways to get the best commission pricing.

    Read the previous article in this series.

    Read the next article in this series.

    Online Brokerages Mentioned In This Article

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