Discount Online Stock Trading: Charles Schwab Calls the Shots

Sam Subramanian PhD, MBA

The largest U. S. online brokerage firm Charles Schwab Corp. (SCHW) has cut commission rates on stock trades. Retail investors will pay $8.95 per online stock or non-Schwab exchange-traded fund (ETF) trade. The new rate represents a $4 per trade discount to the previous rate or savings of 31%.

The lower rate hitherto available only to active, high net-worth households is now available to retail investors regardless of account size or trading frequency. It is also available to investors who trade in Personal Choice Retirement Accounts (PCRA) or Company Retirement Accounts (CRA).

Schwab's new commission schedule compares favorably with base fees of $9.99 at TD Ameritrade (AMTD), $12.99 at E*Trade (ETFC), and $19.95 at Fidelity Investments. The new schedule is also lower than the $9.99 E*Trade and $10.95 Fidelity Investments charge for certain active traders with higher account balances. Among larger online brokers, Scottrade at $7 per trade offers a lower cost alternative to Schwab.

Charles Schwab offers free ETF trading

This move to cut trading commissions is Schwab’s most recent salvo at its competitors. It comes on the heels of launching six low-cost ETFs.

All Schwab ETFs except U.S. Small-Cap and International Equity have a highly competitive expense ratio of just 8 basis points. The latter two ETFs charge 15 basis points. Schwab is also allowing its customers to trade these 6 in-house ETFs free of charge.

The intensity of competition initiated by Charles Schwab in the discount online stock trading industry is suggestive on a bull fight!

What do these changes mean for you?

In many cases, it makes sense to invest in companies whose products or services you like to use. Online brokers, at least in the current milieu, are different.

Good to be online broker customer

Price competition among online brokerages should help you lower your commission expenses. Brokers know that competition is just a mouse click away and they have to be competitive on price. As such, it is highly likely that one of Schwab's competitors will respond by cutting commission rates.

Likewise, commission free trading of low-cost ETFs is another goodie. Schwab is expected to add 2 more ETFs to its slate of commission free ETFs for its customers. They are:

The new ETFs are expected to have measly expense ratios of 35 basis points.

Internal Sponsorship

Bad to be discount stock broker investor

Some time ago, in Online Stock Trading Companies: Buy, Sell, or Hold, I had commented that shares of Ameritrade and Schwab can be bought or held by long-term investors. Things are now changing for the worse. Investors who own shares in brokerage firms like Schwab, Ameritrade, and E*Trade should be rightly concerned with competition pressuring margins. Players like Interactive Brokers (IBKR) and optionsXpress (OXPS) are also vulnerable.

Schwab is taking aim at the competition at a time when online brokers are facing headwinds. Trading volumes are down. In November, Schwab's average daily trading volume was lower by 27% than a year-ago and 11% lower than a month-ago. Meanwhile, near-zero dividend yields on money market funds have compelled brokerages to waive fees on such investments so that they can pass on at least meager income to investors.

I believe shares of online brokers should be avoided for now.

Line your pockets by trading other company stocks, not your broker's. When it comes to discount, it pays to be a customer ... not an investor.

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