Charles Schwab Just Made Stock Trading Free. Here's Why That Might Be Bad News for Investors
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Charles Schwab just made it cheaper to buy and sell stocks whenever you want. That doesn't mean you should.
On Tuesday, the discount brokerage said it was offering clients unlimited commission-free online trades on all stocks, exchange-traded funds and options. (Trading options will still cost 65 cents a contract.) The decision followed a similar move from smaller electronic-trading rival Interactive Brokers. And both firms were following the lead of digital newcomer Robinhood Markets, which pioneered the no-commission trading model. (Schwab didn't immediately respond to a call seeking comment.)
“What’s really different here is just Schwab’s size,” said Josh Rowe-Heupler, an analyst with MagnifyMoney.com, a financial comparison web site. “Some of their other large broker peers are going to be feeling the heat and will definitely be reviewing this news to see if they will be lowering fees also.”
Shares of Schwab fell nearly 10% Tuesday as it warned the competitive move would cause a hit to revenue, but its share losses were tiny compared with those of rivals like TD Ameritrade, which fell 22%, and E*Trade, down 18%. TD Ameritrade later said that it would match Schwab's offer.
The Risks of 'Free'
Schwab’s move is the culmination of a decade-long shift in which technology has democratized markets, making ever-more complicated investment products cheaper and easier to trade, said Quincy Krosby, chief market strategist at Prudential Financial.
While some at-home traders may save money in the short-term, there may be downsides, especially for less sophisticated investors. These same technological and cost barriers once effectively protected the average investor from some of the most dangerous market derivatives. That's because, generally, the more risky and illiquid the product, the higher the barriers were. With Charles Schwab’s offer, however, the cost of trading options and leveraged ETFs -- mutual funds that deliver double or even triple market returns -- could be negligible. “If you’re right, you will make a very handsome return,” says Krosby. “If you’re wrong, it can be very damaging. This is the good, the bad, and the ugly.”
Even if consumers only use the new offers for safer instruments like broad-market ETFs, the temptation will be there to jump in and out of the market, say experts. Most studies show that trying to time market moves is a costly folly, with portfolios often lagging the broad market by a percentage point or more a year. In other words, buying into or selling out of the stock market at the wrong time is likely to cost a lot more than the $6.95 saved you might save on a stock trade.
Rowe-Heupler compared the rapid technological changes in the investment world to those in the early 20th century. At some point, drivers stopped accepting toll roads and turnpikes and expected all ways to be freeways. “Just because you can drive your car at 160 miles-per-hour down the road doesn’t mean that you have the expertise to do it or that you have the right car,” says Rowe-Heupler.