Commission Free Trading / Option Education

If you are an active investor who uses online stock trading services or are thinking about using an online stock trading service, you have likely seen advertisements for commission free trading services. In one respect, the advent of free brokerage services is a reflection of the spread and power of the Internet to fundamentally change the way everyone does business. However, all investors should exercise caution before signing up with a commission free trading service. First of all, it is important to realize just how free stock brokerage firms work. The majority of discount commission brokerage firms make money by charging a percentage or flat fee per transaction – i.e. if you buy x amount of stock, you pay the brokerage firm y dollars. Because free services do not have this revenue stream, they need to make money another route. The primary way free services make money is from investing clients’ margin and cash balances; in a sense using the money you should be investing with to make profits for them. In order to maintain sufficient assets, commission free trading services will require investors to keep greater balances in their accounts than discount brokerage services. And because they do not want you to move too much money out of your accounts or use too many services, they will generally have lower limits on how many transactions you can do each day or month. And because the free service will be trying to cut every corner possible, they will also not go to great lengths to provide you with exceptional service.

One area in particular where you may find free services lacking is in the amount of financial information and investing education material that are made available. Discount brokerage services offer a surprisingly vast amount of educational material. This is important for any investment decision you may make, and doubly so if you are planning to invest in an investment product that you are unfamiliar with, such as options. A solid options education is essential before venturing to put money into this complicated and often misunderstood investment strategy. Options are quite different from stocks: options are essentially contracts that give you the right to buy or sell stocks at a particular price on or before a particular date. While owning a stock gives you an interest in the assets of a corporation, an option just gives you the opportunity to buy or sell a specific number of stocks at a set price at some point in the future. While this may sound simple, in practice selling and buying options is quite tricky, especially when you start buying options to sell stocks, what is called a ‘put’ option, as opposed to a ‘call’ option. For this reason, it is important that you select an online broker that can provide you with an option education that will give you a sufficient knowledge base to properly assess the opportunities and risks associated with options. Buying options, like any other investment product, comes with a certain amount of risk, and it is important as a prudent investor to be aware of these risks.