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    Home»News & Politics»Business»Want to trade? Beware commission free brokers
    Business

    Want to trade? Beware commission free brokers

    Paul ChristophersenBy Paul ChristophersenOctober 26, 20201 Comment6 Mins Read
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    If you are interested in the markets and want to start trading stocks, you will have most likely come across the fetid pool of commission free trading apps. These have sprung up over the last few years and provide a free service with apparently no catch. 

    Services like trading 212, etoro, Robinhood (US only) and plus500 may ring bells due to their seemingly never-ending slew of recent online ad campaigns. In one etoro advert, big name boss baby Alec Baldwin berates the potential user for missing out on massive tech stock opportunities when they could have simply signed up for etoro! 

    But is it that simple? How does a commission free service work and will you be actually trading equity (stock)? Finally, is there any alternative?

    Frankly, and possibly as you might expect. The answer is no. These services are neither simple nor a good option for the new investor. These apps have to make money from somewhere and they do, primarily from your data and secondly from pushing you towards more niche services. Services like trading 212 and Robinhood do away with good conduct and use user data to inform larger financial intermediaries, ad agencies and algorithms as to where your money and investment is moving. Equally, now these services have significant and more active user bases, this information flow is becoming increasingly one sided. Market movements and popular stock information becoming harder for users (especially free users) to access. And with less information comes more risk.

    Regulation is another issue. Trading 212, plus500 and etoro are available in the UK and regulated by the FCA (Financial Conduct Authority) giving users a certain amount of security and buffering against possible negative balances, yet many other clone services are not regulated and pick up users due to the confusion as to what is available. If you do plan on using a mobile broker, make sure the application you are using is legitimate and FCA approved.

    Perhaps the most notorious of these services is Robinhood, yet potentially the riskiest. Robinhood has had to delay its UK launch indefinitely, due to safeguarding concerns within the US. Possibly the most erratic of commission free brokers Robinhood has faced scandal after scandal. Loopholes allowing traders access to ‘infinite leverage’ on options with the promise of infinite returns before inevitably wrecking these traders’ funds. A recent suicide in the US attributed to one Robinhood user’s -$730,000 balance. Robinhood’s framework and security is in serious doubt. To add to this plethora of scandal, incredibly weak customer service and a focus on derivatives means I would advise completely against using Robinhood after any potential UK launch.

    Another issue of concern is that these brokers make money through payments for order flow. The trades ‘you’ make may be directed to a specific market maker thanks to an amount that market maker has paid to the service you use. Without knowing, users may be accessing a more restrictive environment than they would wish.

    Additionally, FCA regulated or not: Trading 212, plus500 and etoro still push UK users towards trading in CFDs under the guise of trading actual equity. These apps advertise with the promise of investing in stocks but quite quickly I’ve found that the user interface pushes new investors towards CFDs and forex even if they have little experience. 

    CFDs (or Contracts for Difference) allow users to ‘easily’ trade stocks via these alternative securities. The issue is that CFD’s have far more risk involved than purely trading equity. As CFD’s are often highly leveraged, these securities may offer higher potential returns yet the potential for far more dramatic losses. In general, I would warn against ever trading CFD’s without prior financial knowledge. In fairness, most of these mobile services attempt to mitigate against greater losses than your initial deposit thanks to their FCA approval, yet this doesn’t remove the inherent risk CFD’s have over equity. 

    The problem is the dishonesty and lack of information from these mobile brokers. I know plenty of people who don’t realise they are not actually investing in stock but are accessing the markets through an auxiliary workaround. The reason these companies push CFD’s so heavily is the reduced costs on the brokers end for providing these services when compared to standard equity, so CFD’s provide an easy way to let user’s day trade without commission.

    So, you’re a new investor and put off by the Hornets’ nest that is mobile brokerage; you want an alternative. What can you do?

    Unfortunately, if you’re planning to day trade equity you may find this quite difficult unless you are investing large amounts of money. Safer, commission-based services that offer personal plans to invest in stocks typically add a transaction cost and a significant commission on each trade. So, if you want to aggressively invest small amounts in penny stocks, you’ll likely spend most of your money on the transaction itself. 

    Hargreaves Lansdown, AG Bell and Vanguard all offer bespoke and secure services in comparison to commission free brokers yet due to the commission they require it is only really worthwhile if you are adopting a ‘buy and hold’ strategy. Even then, these more secure services point people towards ETFs or Stocks and Shares ISAs rather than individual equity. This isn’t a bad option if you are just looking to invest your money safely in a specific portfolio but it won’t allow you to trade yourself. 

    Ultimately, it’s a difficult path to safely invest and get into trading. I think if you are only investing a small amount of money and would like to learn, then FCA regulated and longer standing mobile brokers like trading212 provide an acceptable service. As long as you are aware of what you are investing in (see CFD’s). However, any new investor shouldn’t be casually throwing large amounts of money around without knowing the risks. If you are wanting to put more significant sums of money into the market, then I would push you in the direction of a commission-based service and to consider the benefits of an ETF before you start to embark on your own portfolio or day trade.

     

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    Paul Christophersen

    Business Editor | 2020-21

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    1 Comment

    1. Bill Brown on November 25, 2020 12:03 pm

      I opened a Trading 212 account and have never felt pressured to trade CFDs.
      I think commission free trading is good but basic and compares favourably with my existing broker who charges £9.99 pm plus dealing charges.
      As regards research I go to various exchange sites and pages on the internet – you don’t have to rely on your broker for that.
      Bill B.

      Reply

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