How Do Online Stock Brokers Make Money?

The Basics

All online stock brokers make money in the same way; they buy and sell stocks for you. The major difference is in the way they present themselves, the interface they use, and the range of assets and instruments they offer. Below we explore how do online stock brokers make money.

Trading Fees

The most straightforward way for an online stock broker to make money is to charge commission on each trade. The cost of employing someone to watch the markets and make the trades for you is more than covered by this single fee. Remember, however, that if you make a large number of trades or trade frequently, this could add up and become quite costly. Some brokers, like eToro, don’t charge any fees other than those incurred by paying for brokerage accounts and maintaining sufficient liquidity in your account. Others, like Interactive Brokers, charge a flat fee for each trade regardless of the volume. This can add up quickly if you make a large number of trades, so be careful here.

Profits From Short Sales

Some brokers, like Alpari, take greater advantage of the fact that you can’t physically own stocks. Instead of charging you an upfront commission for each trade, as mentioned above, they make money from short sales. What is a short sale? It is when an investor sells a stock he doesn’t own, in order to gain possession of the shares before the trade settlement date. The investor buys the stock back at a lower price, making a profit in the process. In most cases, the investor is required to give the stock back at the original price within a certain time period (this is know as the turnover requirement). Many online stock brokers offer tools that help make short selling simpler and more appealing. For example, Alpari also offers a Short Selling Handbook that answers common questions about short selling and offers suggestions on how to use the platform intelligently.

Trading Platforms

The interface a stock broker provides is one of the key elements that differentiate the services offered. Platforms like Investools lead the market in providing a simplistic yet elegant interface that allows users to quickly and easily place trades. Alpari is perhaps the best known stock broker for providing a mobile-optimized interface that allows for quick and easy access to financial information on the go. The main purpose of the online trading platform is to make it as easy as possible for users to gain access to real-time market data and functionality that allows for high-quality, successful trades. Some financial web platforms, like MetaTrader 4, also provide an offline mode where users can place and manage orders, even when they are not in the presence of a network connection. This can be a useful feature for those who want to place orders at odd times, when the Internet is not available or accessible.

Fully Funded Accounts

Another way for an online stock broker to make money is to allow users to fund their accounts as they see fit. Alpari allows users to start with a $5 promotional deposit and then earn interest on their accounts. Many brokers provide an automatic investment program that allows users to set up regular savings and investment plans. In addition, some online brokerage platforms offer fully funded retirement accounts that allow for additional savings and investment opportunities. If you are looking for a reliable, reputable institution that allows for easy access to an abundant range of investment vehicles, then look no further than Alpari.

Margin Accounts

Still another way for an online stock broker to make money is through margin accounts. With a margin account, you are essentially borrowing money to invest, as opposed to putting your own money directly into the stock market. The major drawback to this is the high-interest rate that is typically applied to these accounts. The interest is paid on top of the original investment, so over time you could find yourself in a very expensive place. The advantage of a margin account, however, is that as a trader you have more freedom in terms of the instruments you can use in your positions. With a margin account, you can use just about every major instrument available in the markets, as long as your broker permits it. The downside is that you have to pay back the loan with interest, which can add up quickly, especially if you are unable to manage your debt effectively. With a margin account, you effectively have two debts: the original investment and the interest on that investment. For that reason, it is best to use this type of account only when you have significant experience and knowledge of investing; otherwise, it may be more difficult to maintain a proper credit rating, so you may be turned down for additional investments simply because of your marginal credit history.

Final Takeaway

In summary, all online stock brokers make money the same way; they buy and sell stocks for you. The main difference is in the way they present themselves, the interface they use, and the range of assets and instruments they offer. Look at these points carefully before picking a broker to help you with your investments; this knowledge will help ensure you make the right choice and choose the best fit for your circumstances. With a little bit of effort and proper research, you can be confident you made the right choice by selecting Alpari to help you manage your investments.