Are Online Brokerages Going To Be Wiped Out by Free Trading Apps?

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Are Online Brokerages Going To Be Wiped Out by Free Trading Apps?

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Once upon a time, stock trading was the exclusive preserve of Wall Street traders attired in red suspenders, frantically yelling into phones. However, the rise of the internet birthed a thriving online brokerage market that has allowed DIY investors to get a piece of the action right from the comfort of their laptops.

Whilst buying stocks online using discount brokerages has long been the cheapest way to buy stocks, it seems that the stock trading tech revolution is not finished quite yet. Indeed, the next generation of traders may simply be able to do all the trading they need from their Smartphones as apps like RobinHood are fast disrupting the market by offering free online trading at a touch.

In this post we will examine how the free apps really operate, and whether their rise could spell the end for traditional online brokers. We will also take a quick look at some of the top online brokers for trading and buying shares in Canada.

Stock Trading & Buying Stocks Online

Stock trading and brokering is seriously big business. For example, the monolithic investment firm Charles Schwab (the largest brokerage firm on earth) has over $7.6 trillion in assets under management (AUM) and services around 33 million individual customer accounts.

However despite their status, Charles Shwab are not actually all that dominant in the online broker sphere. However their rival Fidelity is very active online and a good portion of their $21 billion of annual revenue and 26 million customer accounts is generated by their online presence.

In terms of the exclusively online brokers, the highly rated US based online broker platform TD Ameritrade now handles over 11 million customer accounts and turned over $4.3 billion last year. If you are looking at buying shares in Canada, then QTrade has grown fast since its founding back in 2000; they now have £95 billion AUM and serves 540,000 individual  customer clients.

However, whilst online brokerages have made the stock & EFT markets both accessible and understandable to a lot of layperson investors, they have not necessarily made it all that cheap to enter and there are few if any discount brokerages out there.

Best Discount Brokerages For Buying Shares in Canada

Most brokers charge fixed trading fees which are levied every time a customer buys or sells assets like stocks and shares. For example, QTrade charges $8.75 per option trade and Questrade has a minimum fee of $4.95 on stock transactions. However, to be fair both do offer free trades on ETfs which are very popular amongst entry level, ‘DIY’ traders.

Whilst these stock trading fees may not really trouble anybody who is dealing in thousands of dollars, they do deter a lot of small investors who are trying their luck and skill in the market for the first time.

For example, an account holder wishing to buy $50 of stock may well have to pay a $10 charge when they buy it and then a further $10 when they sell it again; this will almost certainly swallow up any profit they might make on the trade.

Free Online Trading

In view of this, the advent of free trading apps seemed almost inevitable. Free trading apps have not only built on the technology that made online brokers so popular, but they have waived the fees so customers can buy or sell for ‘free’. This is by far the cheapest way to buy stocks and as such has given rise to a new generation of small time speculators and has truly opened up the stock markets.

The most famous (or perhaps notorious) of the free trading apps right now is RobinHood. RobinHood’s user account holder numbers have grown exponentially, blossoming from a humble half a million in 2014 to a whopping 22 million in 2021. Its revenue has also grown steadily too and reached $91 million U.S. dollars as of 2021.

This is a pretty impressive market share for such a young company. Whilst a lot of their customers are first timers or investors who were previously “priced out” of the market, a good portion of their customer base has in fact come at the expense of the traditional online brokers.

But Is It Really The Cheapest Way To Buy Stocks?

However, few things in life are ever really truly “free” and that impressive $91 million must be coming from somewhere right? Even if something doesn't have a clearly apparent price, you can still bet your bottom dollar it comes at a cost.

And alas, after the initial 30 day free trial period, RobinHood customers are charged a $5 per month fee - however this is not particularly unusual and many an online brokerage will also charge a quarterly “custodial fee” in addition to their hefty trading fees.

Most of their revenue however appears to come from “order flow” which basically means that RobinHood is making a small amount of each transaction from other brokers when they refer their customers to them. The process of “order flow” is a slightly controversial one that may represent a conflict of interest; as such and it is currently under review from the SEC.

Furthermore, it has been reported that RobinHood sells its users data to third parties much in the same way that Facebook and other big tech companies do.

The selling of user data is becoming an increasingly lucrative but also controversial practice and as such, by engaging in it RobinHood is arguably compromising its reputation as being somehow “against the system”.  Some commentators would even go as far as to say that users are better off joining traditional brokers and paying the fees rather than having their data mined.

What Is The Future of the Online Brokerage Sector?

Whatever your views on RobinHood, it has certainly forced the online brokerage sector to take notice. Even the discount brokerages are now reviewing their own fee structures in order to try to win back some of those customers who joined RobinHoods little band of stock trading merry men.

If you are looking into buying shares in Canada, then you may be interested to learn that Canadian broker Wealthsimple Trade is edging towards free online trading and as we said earlier, big brokers like Qtrade and Questrade are already offering fee-free ETF trading. Still, despite these encouraging signs there does seem to be some way to go before we see anything like completely free online trading from the bigger firms.

Despite a few recent setbacks, it seems that RobinHood and the free apps are still going from strength to strength and for many, they are the cheapest way to buy stocks.

However, the investment market is a big one, so there is every possibility that it will accommodate both the free apps and the more established brokers who are willing to innovate and change with the times. Either way, the good news is that it has never been easier to get investing, and that buying stocks online has never been cheaper.

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Are Online Brokerages Going To Be Wiped Out by Free Trading Apps?

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