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  • Writer's pictureIshfaaq Peerally

The TRUTH About ZERO COMMISSION TRADES From Charles Schwab and Robinhood ⚠️

Not such a good day for the markets $SPX500 but good day for our portfolio mainly because of rising $OIL prices with $CXO and $PE up by 0.7% and 0.5% respectively. The best performer, however, is $DGE.L which is up by over 1%. I took the opportunity today, to add more shares of $AGN and $GME to the portfolio.

The TRUTH About ZERO COMMISSION TRADES From Charles Schwab and Robinhood ⚠️

Last week, Charles Schwab $SCHW announced that they were dropping commission on online trades. The next day, TD Ameritrade $AMTD and E*trade $ETFC made the same announcement. Stocks of all three companies crashed. Who are the winners or losers from this? What about Robinhood? eToro?

Charles Schwab is the 13th largest bank in the US and are more than just a brokerage firm. Only 7.5% of their revenues come from trade commissions. Dropping the commissions mean that more people will move to their business including their banking business. In the short term, this can affect their revenues but eventually, they are going to win from this. The market overreacted to this news.

Adam Smith in his book, The Wealth of Nations, talks about how competition forces businesses to bring prices down. That's exactly what's happening. Charles Schwab is just reacting to brokers such as Robinhood, Webull and M1 Finance. Now, traditional competitors of Charles Schwab, namely, TD Ameritrade and E*Trade had to drop their commissions too. 36% of revenues of TD Ameritrade comes from commissions while 16% of revenues of E*Trade comes from commission. Both of these companies are losing. They don't have the reputation that Charles Schwab has. The drop in stock price is justified.

Traders and investors are of course winners from zero commissions as this will give more people the opportunity to own financial assets and profit from the low interest rates. I trade on eToro and not on a traditional broker mostly because I don't need to pay commissions.

The problem, however, is that many people are going to trade. Wasn't that a good thing? Yes but most people don't have the knowledge and money to trade. They are going to trade more than required. If you're a day trader and you want to make 1% per day. This is a realistic goal. You only have $100 to trade and you make $1 everyday(before taxes). You're not happy with that. You want more. You use leverages, margins, options, you trade more often, you take more risks. This is not for most people. Being able to invest with just one click makes it too easy and easier to lose money. You won't need to do your homeworks before a trade since you're not paying for anything. You don't like the trade, you just close it and open a new one.

I lost a lot of money on eToro when I first started. On the first day, I invested in oil $OIL with $100 with a X50 leverage. It means, I invested $4900 with other people's money. You see the risk in such an investment. I made $24 that day but on the next day lost $56. I lost $600 once trading the Spanish Index $ESP35 . At the time, this was a record loss and a big part of my portfolio. Even on Bitcoin $BTC . I bought at $900 and sold at $19 000. But I didn't sell everything at $19 000. I even sold some at $6000 and was unable to lock the gains. People who are not accustomed to the stock market are not supposed to trade Bitcoin. Zero commissions trading makes it seems like a casino.

Zero commission is a great thing but you should always do your homework when investing. This should not change your investment strategy. You were trading twice per year with commissions, keep doing so even without commissions.

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