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Two new players in the online trading arena have brought the price of buying and selling shares nothing but the traditional online brokers say they are not worried about competition. The last entry is that free trade offers, free quotes and no minimum order.

Philosophy is free with quality, not cheap and free. The company aims to have one representative for every 300 customers – five times more than the industry average.

The company is able to stock transactions free and still keep a high level of customer service to maintain profits as it concerns the distribution of the electronic-commerce businesses and the cost for some of its services, according to Koslow.

New York-based American Express Co. also offers free trade, but requires at least a $ 25,000 balance for free shares and buys a $ 100,000 balance for free sale of stocks. But the company is not worried about competition from start-ups, said spokesman Dave Kanihan. At the American Express Web site, customers get access to e-mail and phone support, financial advisors, private search and online financial planning tools. Financial Cafe.com provides telephone and email support, but not consultants.

Although it is too early to say, there is a sense that free trade is a niche market. But the presence of these services can drive down prices across the board. The biggest challenge lies ahead for online advertising and e-commerce partnerships to prove themselves as reliable sources of cash, a difficult task because customers are accustomed to a wide range of services from their brokers.

Most brokers try to win new customers with the allure of low commissions, professional, free electronics, or a host of other incentives. Although many of the overhead costs of trading, the commissions, there are other more significant costs that offset lower commissions.

Bid / Ask Spread

The bid-ask spread is the difference between the price quoted for buyers of security and the price is quoted vendors. A trade of 1000 shares of a stock with a bid of 19.90 and an ask of 20 is a typical commission of $ 14.95 up your discount broker to 20,014.95 and the cost to implement. But turn around and try to sell that stock immediately and you only have the offer price of 19.90. Add another committee to stock a Securities and Exchange Commission for a fee, 00,307% of sales to principal sales and the cost of trading and the stock jumped to $ 130.51. it is So much for low commissions.

Consider the bid and ask spread as a percentage of the transaction. If a $ 20 stocks a range of 10 cents, the cost of distribution will reduce the return on the market by 0.05%. For more expensive stocks, the overhead is as a percentage of the trade. A stock trading at $ 100 with a 10 bid / ask spread has a 0.1% overhead of the bid and ask spread. Not bad. Now consider penny stocks. A stock trading a 80 cent with a 5 cent spread is an overhead of 6.25% of the bid / ask spread alone. Consider placing $ 10,000 of such stock, the bid / ask spread will set you back $ 625! That is $ 10,000 as the value of the stock is available at the current asking price.

Poor Liquidity

When the bid and ask prices are quoted on the market, are only good for certain number of shares. The numbers of shares offered at the quoted bid or ask price is known as the size or the depth of the market. When placing a market order for a number of shares greater than the size of the bid or ask, some of the orders are filled at a worse price than was quoted. These partial executions are common for large orders, penny stocks, and light stocks traded option contracts.

When stocks trade in large quantities, especially penny stocks, not dependent on the bid and ask quotes from your online broker, get the phone and ask your broker to get a better price.

Order Delays

When it ultimately reaches the market, it cannot be implemented in time. Orders are not meeting the market immediately subject to price fluctuations, which may add to or reduce the cost of the transaction. Stock and option orders are not executed by your broker; it is forwarded to either an ECN or directly to an exchange. This routing can add to the delay between placing an order and getting it implemented. The way your order will be diverted determined by the best performance your broker. Brokers often get paid for routing order flow to ECN’s. ECN’s how the execution of orders using proprietary algorithms that analyze quotations from various sources and the destination of the route that best bid or ask offers. If sources multiple honor the best bid and ask, the ECN will route to the destination that the benefits. These decisions are made electronically, but lining up waiting for orders to be followed, and these delays can lead to poor execution price.

Liquidity

The bid/ask spread is wider for securities and traded slightly higher in active subjects. In general, the more volume in a better security prices, and the greater the chance your order will be implemented soon. Try to ensure that trade in a market where the floor broker has to worry about whether your order forms. A market with many active buyers and sellers allows traders to liquidate their positions quickly, and often results in lower spreads and faster executions. This is particularly true in the options market, since the bid and asks spreads are subject to change without any business at all.

Margin Rates

The overhead of the trade can be substantial. What are the costs of inaction? The interest charged on money sitting in a brokerage account credit. The rate for the loan interest paid by most brokers is a pathetic low, often a fraction of a percent. The margin rate, the interest on money borrowed from your broker to trade share amounts above the value of your account, are often half percentage point higher than the broker call rate. At the time of this writing, the call agents were 4.25%. Margin interest costs can be 20 times the rate of credit. Most brokers have a way to cash in a sweep money market fund or a similar interest comparable to a CD (certificate of deposit) or short-term Treasury bills, bears but you should ask.

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