Price wars can be great for consumers but dreadful for the marked-down providers. Just consider the current state of airlines or movie rental chains, and you'll know what I'm talking about. So perhaps that's why CS First Boston downgraded shares of Ameritrade (NASDAQ:AMTD) earlier this month after the company launched a limited 12-week test for its new IZone brokerage service, which offers $5 stock trade commissions.
Discount brokers, by definition, offer value-priced equity transactions. Individual investors have been tested in recent years as a market lull spurred consolidation and many brokerages resorted to new fees and layoffs to help counter investing apathy.
Things have started to gradually change in the industry's favor even as investors in discounters such as Charles Schwab (NYSE:SCH) and E*Trade (NYSE:ET) find their shares trading below where they were a year ago.
When we spoke with Ameritrade CEO Joe Moglia earlier in the week he defended the IZone test, saying that it was simply a trial balloon and that he didn't expect the company to suffer with its regular accounts migrating to the new bare bones service that offers dirt-cheap trades but little in terms of online research and customer service.
Why not?
"These concerns are overly exaggerated," he claimed, comparing it to General Motors (NYSE:GM) offering Cadillacs as well as Chevy Cavaliers, each line with its own value proposition and set of features.
Rather than folks trading in their Cadillacs for Cavaliers, the emphasis is on the pricing test's potential to win over new accounts. The company closed out the quarter with just more than 1.7 million qualified accounts, and the industry has evolved beyond the commission schedules.
In fact, it was the company's December quarter surge in net interest revenues -- not commission and clearing fees -- that drove the discount broker's profits higher. But even beyond the Fed's helping hand on that front, discount brokers have evolved into more well-rounded financial institutions. It was not an accident when Toronto Dominion Bank (NYSE:TD) acquired Waterhouse Securities a few years ago. Folks who trade online are a lucrative market for other financial products, and they are usually smart enough to go the deep discount route with their online brokerage accounts.
That doesn't mean that we're entering the age in which trading commissions are seen as loss leaders. However, with eyeballs glued online worth so much these days, the $5 stock trade may be something that more than just penny-pinching investors can applaud.
Are you looking to trade online? Have you checked our Broker Comparison Table lately? Who is the best discount broker for you? All this and more -- in the Discount Brokers discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz relishes the power and free will of the online investing experience. He does not own shares in any of the companies mentioned in this story, and he is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its stage of defiance.
