Q: I'm a longtime TD Ameritrade customer, and the company recently eliminated its stock trading commissions along with most other major brokers. Aside from the obvious cost savings, what are the pros and cons for this?
Like you alluded to, the move toward zero commission stock trades is likely to save stock investors a significant amount of money over time. If you buy stocks once a month, the elimination of TD Ameritrade's (NASDAQ:AMTD) $6.95 commission will save you more than $83 per year.
However, that's not the only reason this is a big win for investors.
In addition to the savings, this makes it easier for investors to put smaller amounts of money into their favorite stocks. In other words, let's say that I have an extra $100 sitting in my brokerage account and that I'd like to add to my Bank of America (NYSE: BAC) position.
Previously, it would have cost me $6.95 to add three shares of the bank worth a total of about $84 to my position. Based on the transaction size, that means I'm paying more than 8% as a commission, making it prohibitively expensive to make such small transactions. Now, I can make small incremental investments like that without regard to trading costs.
One caveat to keep in mind is that commission-free trading makes it easier to overtrade, which means buying and selling stocks too frequently. Without the element of cost to worry about, it can be easier to justify moving in and out of stock positions. So, while the move to zero commission trading across much of the online brokerage industry is a win for investors, it's important to not let it get in the way of your long-term focus.