Picking the Right Online Broker
Pay-per-Share versus Pay-per-Trade Brokers
There are pay-per-trade brokers and there are pay-per-share brokers. The main difference boils down to how much is your expense, or the commission you pay, per trade.
If you're a pro day trader, meaning you execute several roundtrip trades each day, then you need to have a low commission structure. I define low as paying between 40 cents and $1.00 per trade when trading in 100-share blocks.
Experience has shown me that most amateur day traders don't use pay-per-share brokers and they don't trade consistently in 100-share blocks. Much of the reason is that the traditional online brokerage industry, which is all about pay-per-trade brokers, maneuvers to retain amateur loyalty.
Here's a big secret that the pay-per-trade brokers don't want beginners to learn of. There are online brokers who charge as little as $.004 cents per share (pay-per-share). That amounts to about 40 cents per trade when trading in 100-share blocks. To the amateur who trades through a pay-per-trade broker and pays $5 to $10 per trade, no matter how many shares are purchased, to hear about that is a shocker—and good news. The few cents you read about above is no misprint.
“What's the catch?” amateurs ask me. “How come I never heard of pay-per-share online brokers?” And then they want to know: “Why only purchase 100 shares per trade?” Those are understandable questions. The answers may be surprising.
First, when you trade ...