When you buy and sell stocks online, you generally work with a brokerage company that might charge you a commission on the transaction. Some brokerages, notably Robinhood, do offer trades without any commission on certain commission-free transactions. In some cases, it might be worth paying a higher commission in exchange for other services offered by a brokerage firm. Shop around for one that meets your needs.
There are brokerages that offer fee-free trading, but that might not be your only consideration in deciding where to buy and sell stocks. Look for a good fee structure along with other features you want, like strong customer service or powerful research tools.
Buy and Sell Stocks Online
When you buy and sell stock, you usually do so through an account at a brokerage firm. That company helps track down a buyer or seller of the stock and holds your stock purchases and cash in an account for you.
While in the past it was necessary to contact a brokerage by phone or even by postal mail, nowadays it's common to use online brokerages that let you buy and sell stock with the click of a mouse or the tap of a smartphone screen. Most traditional brokerages and financial firms now have online brokerages, from Bank of America to Charles Schwab, and some new companies have also entered the online stock trading fray.
Normally, you can enter the number of shares of a particular stock you want to buy or sell and automatically have the cash debited from your account to buy shares or paid into your account when the shares sell. You can also enter more complicated limit orders, buying or selling stock if prices cross a certain threshold, if your brokerage supports it.
Stock Trading and Commissions
Most brokerages charge a commission when you make a transaction. The fee is often the same regardless of how many shares of stock you buy, so it can be advantageous to make large purchases or sales all at once if you can afford to do so. Some brokerages offer some customers a limited number of free trades per month or even offer commission-free trades altogether.
Robinhood, a relatively new online brokerage, made a name for itself offering commission-free trades, and others such as Firstrade and M1 Finance also offer commission-free transactions. Other services allow you to pay a monthly fee rather than commissions on individual trades.
Funds Instead of Stocks
Many brokerages also allow you to pay no commission when investing in certain exchange-traded funds, which are bought and sold similar to stocks but pool investor money to put into a variety of investments. Many of these are index funds, which invest in all the stocks on a particular market index such as the Dow Jones Industrial Average, Nasdaq Index or Standard & Poor's 500 Index. These funds do charge fees for managing your money, like all investment funds, but they're often lower than traditional mutual funds.
Investing in funds that track a large swath of the market as a whole can be less risky than investing in individual stocks. It can also require less effort on your part to figure out which stocks to pick. Consider fees charged by funds, what type of investments they make, the issuer's reputation and past performance when you're considering where to put your money.
Considerations Beyond Commission
Which stock trading site is best for beginners? Which is best for seasoned investors? It ultimately depends on exactly what you're looking for, which varies from person to person.
Commissions aren't the only consideration when you're looking into an online brokerage. You might also want to research the types of services a brokerage offers, including investment advice, in-house mutual funds to invest in or phone support.
Some brokerages also offer more support for getting the best prices on larger trades, which can be important if you get to the point where you're selling or buying hundreds of shares at a time. Many also offer stock history and data, which can be useful when you're considering which securities to buy. If you already do business with a particular institution for banking or to manage your retirement accounts, it might be handy to also use that company for your brokerage needs, although fast online transfers make it relatively simple to move money quickly between financial institutions.
Transferring Between Brokerages
You can also open multiple brokerage accounts and, if you need to, transfer investments between brokerages, often with any fees covered by the institution receiving the funds.
You can usually transfer entire brokerage accounts using a digital system called the Automated Customer Account Transfer Service, or ACATS. Work with the institution where you're moving your account to do so. This is often preferable to selling the stock at one brokerage and buying it again at another, which can trigger a capital gains tax liability if your investments have grown.
In some cases, if you have money in a fund that's only available through a particular broker, you may have to close your position there and declare a gain or loss if you close your account.
Buying Stocks Without a Broker
In some cases, you can buy stock without going through a brokerage firm by working with a direct purchase plan run by the company that is offering the stock. Sometimes these can offer stock at a discount or include low transaction fees relative to a traditional broker.
If you're thinking about doing so, consider whether it's worth holding the stock separate from your other brokerage accounts if you have any and whether you will save money or time by buying the stock directly rather than through a broker. Make sure you understand all the fees and other conditions involved with any investment.
Some companies also offer employee stock purchase plans, which allow their workers to buy stock through the company. Others offer company stock or the option to buy stock at a reduced price as part of employee compensation. Check what your employer offers and consider whether it seems like a good deal compared to other investments.
Stock Market Trading and Taxes
Even if you find an online brokerage that offers commission-free transactions and you don't have to pay any fees, keep in mind you may still have to pay taxes to the government when you make a profit on your stock sales.
If you held on to stock or another investment, including real estate, for a year or more, you can pay tax at the long-term capital gains rate. For most investors, this is 15 percent, though some pay 20 percent or 0 percent, depending on total income. This is usually lower than your ordinary income tax bracket. If you had an investment for less than a year, you will instead pay the ordinary income rate on what is considered a short-term capital gain.
If you sell an investment for less than you paid for it, that is called a capital loss. You can use capital losses to offset capital gains in the same tax year or offset up to $3,000 per year of ordinary income. If you had more losses than you can deduct against gains or ordinary income, you can roll them over forward to future tax years until they are exhausted.
Taxes may be one factor of many in deciding whether to buy and sell stock. Stock and other investments owned through retirement accounts such as individual retirement arrangements or 401(k) plans are generally taxed when you take money out of the account, not when you sell the individual shares.
- Robinhood: Trading Fees on Robinhood
- Robinhood (company) - Wikipedia
- Merrill Edge: Zero-Dollar Trades
- Firstrade: $0 Commission
- CNBC: Popular Investing Apps that Let You Trade for Free, or Next to Nothing
- Direct Stock Purchase Plans: a Viable Alternative to Online Brokerages? - ValuePenguin
- A Good ESPP Is a No-Brainer - Wealthfront Knowledge Center
- IRS: Topic Number 409 - Capital Gains and Losses
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.