Well, it’s not exactly breaking news that Fidelity has said it will offer free online trading. What is worth noting is they will not be making money off of your cash by lending it out as was explained here:
You may have seen that Charles Schwab has reduced its commissions to $0.
But when you dig a little deeper you realize there’s a catch. As it turns out it’s free but Schwab gets to use your cash, lend it out, and pocket-the interest you could have made.
“Schwab doesn’t use money-market funds or short-term Treasury funds, which could earn nearly 2% at recent rates,” explains Jason Zweig at the WSJ. “Instead, it shunts the cash into Charles Schwab Bank, which currently pays 0.55% on the money—and then turns around and lends it out at roughly 2%.”
Clearly you can see Schwab isn’t working for free.
What this means for you is not a whole lot unless you trade all of the time and will perhaps see a small reduction in friction costs.
It has been my experience that investors end up with a rat’s nest of positions they end up buying for “free,” and never know when to sell.
At the heart of the race to $0 is the value proposition for investment advice. Free trades are not advice. Free trades are a way to keep or gather accounts.
Your goal is to achieve investment success, not free trades.
