Written By: John DrachmanTalking to “Chuck” got easier. As Schwab dropped its $4.95 commission per stock, ETF and option trade this month, TD Ameritrade and E*TRADE announced they will quickly follow. These established firms are swatting back at Silicon Valley upstarts like Robinhood, which has offered commission-free trades on ETFs for years. This latest price-slashing move is part of a broader trend fueling digital upstarts and established firms alike as the market for low-cost ETFs and index funds continues to boom.
Life after commissionsA net plus for investors, no-commission trades can boost returns. However, there is more to crafting a successful portfolio strategy than not paying a commission:
- Commission-free doesn’t mean no cost To keep their doors open, broker-dealers have other ways to make money that are less transparent. Take the bid-to-ask spread on a typical stock purchase. You may pay a little bit more than the prevailing price when you buy and receive a little less when you sell. Less efficient trading on a broker’s part though can let them capture revenue by routing trades in a manner that widens those spreads to their advantage.
- Candy store effect Just because you can trade for free doesn’t mean you should trade whenever the urges strikes. Average investors may tend to overtrade over the short-term. Longer-term holding periods in contrast have a proven track record for better outcomes. In fact, since the 1920s, every 20-year period for the S&P 500 Index delivered a positive return – even during the Great Depression.
- Right-size your capital gains Any gains from a stock investment sold in less than a year is taxed as ordinary income. That could be high as 39.6%. If sold after one year, on the other hand, the capital gains rate drops almost 50% – to just 20%.