The race to zero is on.
And it’s heating up.
Most major discount brokerages have dropped their headline commissions on stock trading to $0. That means someone can buy stock for no fee.
It’s amazing!
Right?
Well, sure. At face value, it’s fantastic. It’s always better to pay less for the same exact thing.
This is particularly true for those aiming to save and invest their way to financial independence and an early retirement, as I’ve done.
I built my FIRE Fund on relatively modest means. I had a middle-class day job at a car dealership, saved 50%+ of my net income, and regularly accumulated shares in world-class enterprises that pay reliable and rising cash dividend payments.
The plan was to retire by the time I turned 40. I wanted to live off of dividends at a young age.
Well, I retired at 33 years old and now live off of five-figure passive dividend income. The plan definitely worked out better than expected. It’s a great spot to be in.
Better yet, it’s a spot almost anyone can find themselves in. I lay that out in my two best-selling books: The Dividend Mantra Way and 5 Steps To Retire In 5 Years.
But back when I first started, I found it difficult to muster up even $1,000 to buy stock. It ain’t easy to save a grand when you’re making barely $40k/year. And that’s when trading fees were still commonly $7 to $10 per transaction.
Those fees add up. Quickly. At, say, $7 on a $1,000 stock buy, I’m paying 0.7%. That’s quite a drag on my dividend income and return.
In response to these fees, I made it a rule of thumb to average no more than a 0.5% charge on my stock buys.
That meant averaging no less than $1,400 per transaction on a $7 commission fee structure.
In this day and age, that might sound nuts. After all, one can go out and buy a single $20 share for nothing.
However, I’m going to play devil’s advocate for a moment here and say that paying fees back in the day was actually an advantage for me in some ways.
From a certain perspective, free stock trades can be a bad thing.
I know that sounds crazy.
But I’ll tell you three big reasons why I could argue this from personal experience.
First, I was forced to think about every single expense in my life.
No matter how small the expense, I had to carefully judge it.
If I’m going to whine and moan about paying $7 to build my wealth and passive income, I obviously can’t sit there and giddily pay $7 for an appetizer at a restaurant, a fancy drink at a bar, or anything else.
It comes down to value, folks.
I heard from so many investors over the years who would bemoan these small trading commissions, but they didn’t seem to have that same attentive attitude toward other (often larger) discretionary spending in their lives. That’s a mistake to pick and choose where you discern value. A $7 fee was a bummer, but a traditional consumer lifestyle was fine. They were being penny wise, pound foolish.
See, I was forced to scrutinize small expenses. And I had to justify the value on everything in my life.
Seven dollars might not seem like much. But just like it adds up on the stock purchases, it adds up in everyday life, too. In fact, it adds up much faster in everyday life.
And that attitude – the scrutiny – scales up as costs rise.
The second reason is, these fees motivated me to save more money.
Knowing that I had to come up with that $7 for a stock trade meant I had to cut that same $7 from something else in my life.
Maybe I didn’t order a pizza on a Friday night. Or perhaps I skipped a Saturday night out to instead direct that capital toward achieving FIRE as soon as possible.
When a mindset takes shape, it’s something that kind of sticks with you for the rest of your life. Habits – good or bad – tend to stay with you.
And I’m thankful for that hardcore focus on value early on.
Moreover, and really more to the point, I was motivated to save more in a very direct way.
What I mean is, I had to regularly come up with the $1,400 on the average transaction so as to limit my friction costs as an investor.
Whereas investors nowadays can just put $50 away on a stock without a thought, I had to put in a ton of effort to come up with that “shopping money” because the “entrance fee” to the store was there.
That had a way of increasing my scrutiny on expenses, because it often came down to a fundamental choice between Item X, Experience Y, or Stock Z. Since stock was what would unlock freedom for me, which is what I prized above all else, it usually won out.
Lastly, I had to fully analyze a business before investing in it.
Because I was committing so much capital to a single purchase at a time, I had to think very carefully about what I was doing and whether or not I was fully confident on an idea.
That meant going through the fundamentals, judging competitive advantages, weighing out risks, and thoughtfully estimating value. I had to do all of that before even thinking about plowing my hard-earned cash into a stock.
There was no easy or cheap way to just move in and out of stocks back then, which helped me to craft my investor mindset just as much as my saver mindset and value mindset.
I realized frequent trading was a bad idea. But I was kind of coerced into staying honest and becoming a true long-term investor because the fees restricted me to a degree.
So that’s my experience as someone who saved and invested in dividend growth stocks with the aim of achieving FIRE. And I’ve operated under both the old fee structure and the new no-fee structure.
With all that said, free trades can still be wonderful.
I’m a big fan of free trades.
Free is awfully nice. I’m happy to take advantage of free trades, even though (or perhaps especially because) I’m no longer aggressively accumulating stock.
But I think having the right mindset in place is incredibly helpful.
Make sure you’re an investor, not a trader.
Don’t let these free trades allow you to slip on your lifestyle choices. There might no longer be an “entrance fee” to the stock store, but that doesn’t mean you shouldn’t still scrutinize your expenses (no matter how small) or get away from focusing on value across your entire life.
So save, focus on value, and scrutinize your purchases (stocks and otherwise) as if those high fees are still in place. Pocket the difference. And grow your wealth and passive income even faster than you otherwise could have!
What do you think of free trades? Did you used to pay fees? Ever find that fees motivated you to save and invest even more?
Thanks for reading.
P.S. If you’re ready to achieve financial independence and retire early, check out some amazing resources I personally used on my way to becoming financially free at 33!
Unfortunately, in Canada there is very limited in commission free brokerages. In fact, I think there is only one and the way it operates is that you can only pick certain stocks to invest in.
My brokerage has $0.01 per share with $4.95 minimum per trade and max $9.95. So 200 shares is $4.95 and 600 shares is $6.00. There are other fees sometimes like SEC or ECN fees which are relatively small.
I now people who have went crazy with the free commissions in the States. Talking like their following Warren Buffett’s method of investing, but in the same time they are holding for a very short time and soon as the price goes up they sell. That person will likely lose everything one day.
IP,
Right. Exactly. If you let the free trades get to your head and go “crazy”, you’re doing it totally wrong. Get the long-term investment fundamentals in place first, then use those free trades to your advantage. 🙂
Best regards.
I thought you would bring up the order flow issues. And the fact that it could lead to a market where it’s harder to understand the final price of the stocks. In our cases it should still end up cheaper in the long term. But for larger exchanges it could definitely be the other way around.
Either way an interesting perspective 😀
Henrik,
I think focusing on the technical aspects of the new fee structure is missing the forest for the trees.
If you’re approaching long-term investing properly, regardless of the fee structure, you will be even better off with free trades. But if you let these free trades alter how you go about your lifestyle or investments, you might come out a lot worse off for it. Personally, I’m grateful for coming up during a time in which the fees motivated me to save more and properly analyze businesses.
Cheers!
I agree that investors shouldn’t let the free trading allow for the tail to wag the investing dog, so to speak. One can also look back and consider that decades ago you had to call a physical broker and pay hundreds of dollars to later receive official stock certificates. This gave much more tangibility of stock ownership versus pixels stored in the cloud somewhere. And as a result of that making a sell decision was much more difficult and took more planning to execute this.
You’ve had free trades for quite some time now and clearly this hasn’t affected your strategy so in that sense it is a good thing.
On another note, I just received a notification that Charles Schwab is planning to buy TD Ameritrade with the deal to close late next year. Interestingly enough TD Ameritrade bought Scottrade several months ago so it does look like there is consolidation taking place in this space. As an investor who holds an account in Scottrade, TD Ameritrade and Charles Schwab, I’m running out of brokers to use with all of this consolidation. The shops like Nvestor and Robin Hood are a bit too small for me as they don’t have basic account provisions like a TOD (transfer on death) feature that most other brokerages have.
Thanks for the article.
-Mike
Mike,
Absolutely. “Don’t let the tail wag the dog” sums it up. If you’re letting the free trades dictate what you do, you’re probably going to come out way worse than had you just paid a $5 commission or whatever.
I’m actually glad I had the opportunity to hone my craft when commission fees were still a thing. As I note in the article, it forced me to do things the right way. I had to be thoughtful about how I went about spending and investing my money, and I was always focused on the long term. It would be easy for me to trade in and out of stocks nowadays, but I’m not doing that. The only change for me now is that I’m buying in smaller lots, but that’s more to do with the fact that I’m no longer directing a lot of capital toward investing. If I were just starting out and chasing FIRE, I’d be going about it like I did before.
Thanks for adding that!
Best wishes.
Hi Jason,
Germany is more expensive than USA regarding the fees, because there are not a lot of people owning shares (direct & over some insurances around 15%). But we also have now possibilities to buy with no costs and I think 3 – 5 years from now this is normal.
I also buy from time to time shares, because my active & passive income is way higher than I need. But in opposite to you I always wait till 1.500 – 2.000 EUROs to buy a position. When I see for example your change in buying stocks so that you have10 – 20 mini purchases per month I´m always wondering. Because this tells me, that you have more days where you buy 1 – 10 shares than days without a buy. This is all OK when this works out for you and when you have fun doing this. But you have with this new strategy several new very small positions with small dividends. Most of my small positions are new companies from my existing companies and sometimes I add to them to get a more serious position. For example I got from Blackstone one share of PJT Partners. This position was 25 $. I added additional 24 shares so that this position make sense. 25 shares is not a big deal as well, and PJT is not paying a good dividend, but so I see I have some shares of this company and this position has some sort of importance..
I´m not as aggressive as I was in the cumulation pase as well. There is simple no need for this. On the other hand I don´t care a lot what the market is doing. So I only look on the possibilities before I have enough money for a next buy. Most of the time I buy 1 position/month and I look for the existing positions if something is available at a good price or I want to have a new company in my portfolio. This is enough activity for me and even if I pay 0 fees (at the moment I pay 5 $/trade) I won´t change it.
The everyday stock market is not that interesting for my life anymore. This was different in my saving phase, I looked to get the best shares worth for my money. If you are doing this for years (and I bet you have the same experience), you don´t need a lot of time to find a share which is not too expensive to buy.
So I assume the 0 fees will get to much more activity with small amounts. Buy 1 share Disney her, 1 Apple there and so on. I´m not sure if this is the most effective way to invest your money. OK, I can understand: There are so many companies out there which are worth to own a small piece. I´m guilty with this as well, I have from 92 different companies shares. This is something emotional and if you need it, OK, go for it. I have seen depots with 20.000 EURO value and 50 companies. I doubt that this makes a lot of sense. So 0 fees forces you to be more disziplined. And I think, a lot of people will fail :).
Best regards
Oliver
Oliver,
Yeah, we’re in a similar position. Investing is no longer a priority in my post-FIRE life. I just don’t see the point of hoarding money or endlessly accumulating assets. So the new $0 fee structure is nice in the sense that I can put a little capital away without worrying about the expense ratio eating into things. But if I were starting out toward FIRE today, I’d be going about it exactly like I did before.
Cheers!
You must be a smart person because you keep writing about various ideas that are eerily similar to the same ideas I have or had.
I was paying $4.95 commissions for years, and like you, I wanted to cap my “friction” at 0.5% So my minimum buy was always $1000. Now of course my minimum buy is 1 share.
DL,
Great minds think alike. 🙂
I never liked paying more than 0.5%. Truth be told, though, I’ve probably paid relatively little in fees over the years. I used to negotiate free trades quite often. And Scottrade used to have this sweet referral program back in the day that gave out free trades, which I used to my advantage. Either way, knowing the fee structure was what it was instilled a great sense of discipline in me, and that’s something I’m really grateful for. If you have the proper lifestyle and mindset already installed, the free trades are icing on the cake. If you don’t go about it properly, the free trades will probably only come to hurt you.
Best regards.
An additional advantage is the ability to reinvest dividends in any stock. I got spoiled with Scottrade’s flexible reinvestment plan. When TD Ameritrade bought them out the most frustrating adjustment was being required to reinvest the dividends in the same stock. I prefer to direct dividends to whatever stock is a bargain. With free trades, this is much easier.
Steve,
I was always a fan of selective reinvestment over DRIP. If you’re selectively reinvesting the dividends, then the thesis of the article is exactly the same. It doesn’t matter if you’re investing $1k from a checking account or $1k from accumulated dividends. The principles are the same.
Cheers.
Hello!!!
I absolutely love free stock trades, but brokers may be discouraged to fill limited orders that I use. I’m not a day trader but trade few times each month. Now, I don’t have to rack my brain figuring out at what price to buy or sell all at once in order to save trade fee. It is harder for online brokers to make a big load of money nowadays that there might be more mergers to eliminate competition, since Schwab is already in the process of buying TDAmeritrade. More mergers mean, brokers will behave badly, especially during any economic downturn, just like right after 2008.
Young,
I wouldn’t fret too much. Brokerages still make quite a bit of money, and they’ll continue to scale up. Last I looked, commission fees from trades made up a relatively insignificant percentage of Schwab’s revenue.
Nonetheless, that’s not related related to the topic at hand. The point here is simple. Make sure you’ve got the proper mindset in place, then use the new structure to your advantage. A lot of people are out there misusing these new free trades, and it’ll probably only bite them in the end.
Best regards.