Free Stock Trades

Stock market commissions have been steadily been declining for several years, but now its free.  Wells Fargo has just come out with an offer for 100 free commission free online trades per year.  The only catch is that you have to have a combined $25,000 in bank, brokerage and loan balances with Wells Fargo.  You can count 10% of your loan balance towards the $25,000 requirement.  If you have a mortgage with Wells Fargo you should qualify.  Even without a mortgage the $25,000 is within reach for most people.  Even better is that this is not a limited promotion, but is the on-going commission rate.  Bank of America has a similar deal, offering 30 commission free trades a month.  Bank of America also requires $25,000 in deposits, but does not allow mortgage balances to be counted, but other than that is the same.  Also, startup Zeeco offers 40 free trades a month.  Charles Schwab the discount broker charges $9.95 to $12.95 as a flat rate per trade depending on the amount on deposit, and the amount of trading activity.

Why would Wells Fargo and Bank of America offer something for free?  As with most things in life, nothing is free.  The Banks obviously want you to increase your deposits at their institutions.  And there is really no downside risk for them.  If someone were deposit $25,000 into a Wells Fargo account to get free commissions on their stock trade, Wells Fargo would of course earn money on the spread between the interest paid, and the interest they earn on the deposits as well as fees and interest on their loan products.  The cost is obtaining these deposits is the free commissions, and that is a small cost.

Unless they are a professioanl trader, most people will not and should not trade 100 times a year or 30 times a month.  More likely, the average investor will not trade more than 5 times a year.  So, there is little chance the free commisions will be abused.  The professional trader who does trade more than 100 times a year is already paying pennies per trade, so there is little incentive for the professional trader to abuse the free trades.

For the consumer, is it a good deal?  Free is always good, but is it really free?  The short answer is that it is never free.  The real question should be  is it a good deal for you?  Forget the ”free” factor and weigh the costs and benefits.  The key is to look at the overall relationships of your accounts, not just your brokerage account.  If you trade 5 times a year, the commission you would expect to pay at Charles Schwab would be around $10 a trade.  This is just an example as Charles Schwab is generally the highest priced of the discount brokers, and you could probably do better with other firms.  But for our example, assume it would cost you $50 to make those trades.  With free commissions, that would save you $50, but you have to look at your other banking accounts to see if this is a good deal.  If you transferred $25,000 to Wells Fargo to get the free trades, and the institution pays 1% more than Wells Fargo on those deposits, that’s $250 less you would receive.  By moving your funds to Wells Fargo to take advantage of the free commissions, you would be worse off by $200.  Not a good deal.  Of course, it’s a winner for Wells Fargo who will invest your $25,000 at higher rates, as well as any balances in your brokerage account.  This is just a simple comparison with 2 accounts, a deposit and brokerage account.  If you examine your mortgage loans, lines of credit, and credit cards, the difference could be much greater.

Its important not to jump on “free” deals, because we know its not free.  That does not mean it could not be a good deal for certain consumers.  It depends on how much they normally trade, and the rates they are receiving on their deposits, and paying on credit cards, and loans.  An example of chasing “free” deals at the expense of your overall financial picture is airline mileage cards.  Airline mileage cards will give you mileage for each dollar you charge on the credit.  You will receive a “free” airline ticket at 20,000 miles, but we know that’s not free.  That ticket has cost you $20,000 in charges, and you could have bought the ticket for its retail value of $300.  If you just focus on the “free” ticket, you will lose sight of what you actually spent on the ticket.  This is obvious to most consumers, but in the case of the free commissions, it is more subtle, as it is intended to be, but if we remember to focus on the costs versus the benefits, we can determine the true costs of any “free” offer.

As for me, I have determined quickly in my mind that it does not make financial sense.  First, I already pay very low commisions at Interactive Brokers.  I pay .005 cents per share.  If I trade 1,000 shares I would only pay $4.00, so even though its seemingly “free”, the difference between what I pay and free is not that much, that I can get excited about.  The service at Interactive Brokers is also very good.  If you are a professional trader, you should consider Interactive Brokers.  The execution and pricing is excellent.  Secondly, I would not be able to get as good rates on my deposits at Wells Fargo or Bank of America than I am currently getting.  The money market account at Wells Fargo is currently at 4.7%.  Not bad, but I am getting over 5% at Emigrantdirect.  At HSBC, you can currently get 6% on your deposits on a special promotion.  The difference is not that much, but the point is I would be worse off on my deposits if I transferred my money.  I don’t carry a credit card balance so that rate does not effect me, and the rates on my mortgage is low enough that it does not make sense to refinance.

So, while this free commission offer does not benefit me, it may be a good deal for someone else’s situation.  In determining the attractiveness of a “free” offer,  just remember not to be blinded by the word “free”,  and lose sight of the big picture of your finances.