If you are as old as I am you probably remember when the term cheap stock trading was an oxymoron. Prior to the advent of discount brokerages unless you held a seat on a stock exchange like the New York Stock Exchange you had to buy your stocks through what today would be called a full service broker.
The brokers held a virtual monopoly on the buying and selling of stocks by individuals and if you wanted to buy stocks you had to purchase through them. This made many brokers very wealthy over the years as the public had no other options to buy stock.
Yes, they did offer a full range of services like free stock reports and free stock picks recommended by their in-house analysts but like anything else in life these services were anything but free.
You always paid the piper when you bought or sold any stocks and these fees were often quite steep with little difference in commissions between brokers. It really was sort of a oligopoly kind of like OPEC is today with oil prices.
In those days cheap stock trading meant buying in volume and in 100 share lots because if you wanted to buy less than 100 shares you got hit with an odd lot fee on top of the commissions. Higher priced stocks also meant higher commissions and it was quite easy to pay one dollar a share or more in commission costs.
Think of the impact that made on anyone that wanted to trade for a living. All of those commissions day in and day out added up to a pretty sizable trading expense which ultimately impacted the trader’s bottom line.
Forget about day trading in those days as the transaction costs would eat up any profits you would generate unless you were a true day trading superstar. Sadly, the days of cheap stock trading online were still years away.
Since a stock broker was paid on a commission basis the more trades they processed the more money they would make so it was in their best interest to encourage active trading as they made money on each buy and sell even if you didn’t.
Sometimes a broker would give you a discount commission to keep you happy but it still wasn’t what I would call cheap stock trading by any means. Even a $50 commission on a 100 share lot is quite expensive to an active trader.
The game all changed in the 1980s as a new breed of stock brokerages sprang up. These were called discount brokers and they offered less in the way of services but much cheaper commission structures. Discount stock trading and relatively cheap stock trades were finally becoming a reality for many investors.
Of course they became extremely popular as droves of stock traders flocked to them to save money on commissions. The days of cheap stock trading were here many thought but little did they know that in this instance good actually became great.
With the explosion of the Internet in the 1990s many of the discount brokers set up sites that allowed you to trade for very low fees like $15, $12 or even $9.95 a trade. At the time that was the cheapest stock trading an individual could hope for.
But it gets even better, as trading platform technology progressed the deep discount broker came into the market and finally the idea of getting the cheapest online stock trading was realized. One online trading platform I use charges less than .01 a share with a minimum of $1.00 per trade. I don’t see how you could make stock trading any cheaper than this!
Another platform I use gives you the option of .01 a share or $9.95 per trade. That way if you trade small volume you can opt for the penny a share option but if you are trading size you can go for the flat rate.
So now traders finally have a choice, they can use full service brokers if they wish or the can use a discount broker and pay a flat rate and still receive great service or they can really indulge in cheap stock trading and set up an account with a deep discount brokerage that is geared for active traders.