How to Trade Commission Free (USA)

If you've been trading stocks for a while and want to cross the huddle to a commission-free zone, trading without brokerage accounts is one option. Dealing with brokers has the advantage of letting them execute trades on your behalf at a fee. That's why it's the best choice for starters.

As an intermediate stock trader, the best option to eliminate brokers is to consider a direct investment strategy. You can also use other methods apart from direct investment, such as IPOs, secondary offerings, among others. Ensure you're aware of the disadvantages you might encounter if you cease using brokerage firms entirely. Let's look at some of the strategies of buying stocks without involving brokers to avoid paying commission.

Direct Stock Purchase Plans

One of the simplest ways of buying stocks to avoid commissions is by going directly to the companies to strike a purchase deal. That's what is termed a direct stock purchase. Luckily, most companies have plans in place to allow the public to purchase stocks directly.

And the goodness of using this strategy is that the proceeds acquired can also be reinvested automatically by buying more shares. This process is known as a dividend reinvestment plan (DRIP). Typically, the buyers will buy the stocks by making direct money transfer from their bank accounts.

Firms will have minimum investment requirements for the first and subsequent purchases. Usually, these amounts will be even lower than the cost of one share in the stock market. Direct stock purchase plans will provide you with statements, just like a bank account, with vital information contained.

Some companies will also have policies restricting non-employees from buying their stocks directly. In other cases, only existing stock owners may be allowed to participate. Be sure to read the disclosure document of the company before enrolling.

What's the Disadvantage of DSP?

However, direct stock plans have a setback; you won't be able to purchase or sell the acquired securities at a particular market price or time. Instead, only the company can sell or buy shares for your selected plan at specific times, such as weekly or monthly.

The disclosure document of a company will have information about how the firm buys and sells shares and the time intervals. Depending on your agreement plan, the company may transfer your shares may to a broker to be sold. You may have to part with some facilitation fees for that to happen.

Additionally, you won't have the freedom to purchase stocks from other companies. An investor with a brokerage account can buy your company's shares as well as those from other firms.

Dividend Reinvestment Plans

When you enroll for a direct stock purchase plan at a company, you'd normally receive your dividends in your bank account. With a dividend reinvestment plan, these dividends are plowed back by purchasing more company shares. Most companies will require a signed agreement for this to happen.

Also, this reinvestment plan is not chargeable but always inquire with the company first to know whether there are any applicable fees.

Commission-free Stock Brokers

In this digital era, online stock trading has become so prevalent that most brokers eliminate their commissions. Most brokers were surprised when Schwab, one of the biggest stock brokers, announced that they would be doing away with their commission.

After the announcement, the weeks that followed saw many online brokers flash their commissions to become competitive. Today, most trading firms don't have brokerage fees, including Fidelity, E*TRADE, Bank of America, Robinhood, and TD Ameritrade.

At this level, we can conclude that zero commission is the new norm for online stock trading. The most suitable broker will, however, depend on your trading style, goals, and needs.

How Are Brokers Able to Work Without a Commission?

Perhaps you're wondering how all these stockbrokers can survive the markets without charging a commission. The obvious answer would be a necessity for the business to remain competitive after Schwab took the lead.

Another explanation is that brokers don't rely on commission alone to earn revenue. These firms supplement their income with fees from bank deposits and withdrawals, margin loans, and property investments.

However, in most cases, commissions will not be nil entirely. Brokers can still earn commission revenue from options trades, phone initiated, and broker-assisted trades.

Secondary Offerings

A company that's already made an initial public offering (IPO) may avail new shares for sale to the public. These shares are secondary offerings and could be from large investors as well. Even if new shares are issued more than once, they would still be called secondary offerings.

Their prices usually are similar or close to the market closing stock prices but may sometimes be a little lower or higher. These also present an excellent opportunity to own shares without paying a dime in commission.

The IPO is a company's primary offering to the public. When a company needs more equity capital, it will avail secondary offerings to do so. It can also issue these offerings to settle its debts or acquire more assets.

Before investing, it's critical to determine the reason why a company is making a follow-on offering. These are additional offerings done by a company to acquire more money to refinance its debts when interest rates run low.

Commission Free ETF Trading

ETFs are a form of security used for tracking a commodity, an index, sector, or assets and can be sold or purchased similarly as stocks. They usually contain more than one investment type. These may include bonds, commodities, stocks, or a combination of different investments.

Different online brokers will facilitate trading EFTs without charging any commission. Such brokers include Fidelity, TD Ameritrade, and Vanguard. Be on the watch out, though; some conditions come with this commission-free offer but are mostly related to the holding period.

Brokerage Firm Special Offers or Compensations

At times, the brokers may put forth special offers on reduced or capped trading fees. When such offers are released, you can seize the opportunity to buy as much stock as you want without paying a dime.

Also, if a broker experiences downtimes or any other hindrance preventing you from trading, you can comfortably ask for compensation or reimbursement. Even though this is not something you can bank on, it can be an opportunity to escape the fees. But the downtime shouldn't be to the level of affecting your regular trading activities. If that's the case, you're better off trading elsewhere than requesting freebies.

Choosing a Low Commission Broker Carefully

Always read through the terms and conditions of brokers with zero commission offers before jumping in. Do the same before buying DSPs, DRPs, and any other zero-fee trading propositions.

With the emergence of the commission-free trend among brokers, most investors, especially beginners, have gained a lot. With limited capital, it becomes much easier to trade stocks without brokerage fees, which add to trading costs. However for some brokers, these fees have been hidden in deposit fees or currency exchange rates. Reading your brokers terms carefully will help you to avoid an unexpected charges when placing commission free trades.

Commission-free trading also makes it easier for investors with limited capital to diversify their investments. For instance, if you have a $1,000 capital, it would be practically less expensive to invest in five different stocks when there is no stress of the fees that might typically consume over $35 of your investment. For new investors, diversification is a wise strategy.