What Is The Real Cost Of Online Trading?

Whenever you read about the benefits of online stock trading, one of the first things that is mentioned is how cheap it is to trade via the Internet.  However, you may well be asking yourself: "if trading stocks online is so cheap, why isn’t everyone doing?"  So, what is the real cost of online trading?

Small stock trader

The fact is, most of the first group of online stock traders were individuals who didn’t trade in large volumes.  Under these circumstances, online brokers charged their customers a small flat fee for their trade, but did not put a minimum buy/sell order on the transaction.  In other words, every time a trade was done, the online broker charged their customer a fee of between $7 and $10.  Given that most trades were valued in the region of between $500 and $1,000, while the commission was indeed low, when compared to a broker in the ‘real’ world, as a percentage of the trade value, it was enough to compensate the broker for the level of work done.  Everyone was happy – and this commission structure is still popular today.

Large stock trader

As the phenomenon of online stock trading took off, many traders who would otherwise have traded using a real life broker saw the benefits of online trading.  Not only were the commissions cheap, but you could also exercise a trade in a matter of seconds, rather than minutes.  With the rise in popularity of large stock trading online, brokers imposed either monthly subscription fees for a certain number of trades (for example, $75 per 100 trades), or smaller commission fees based on the value of the trade (for example $0.01 of the trade value).  Obviously this increased the real cost of stock trading via the Internet; however, the commission charged by online brokers is still considerably cheaper than that charged by other stock brokers.

The real cost

Overall then, the real cost of trading via the Internet will very much depend on the amount of shares you want to buy/sell, and the number of transactions you wish to do in any one day or month.  Having said that, most online stock brokers have now adapted their commission structures to suit the needs of their customers – whether they be small or large volume stock traders.

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