If you are reading this then you most likely don't trade on an institutional level for a group of high net-worth individuals or pension fund but rather use one of the traditional brokerages and investment management companies to trade and manage your investments. I'm a retail investor and so are you. Many of the well-known brokerages include TD Ameritrade, E*trade, Charles Schwab, Scottstrade and Interactive Brokers, however, the competition amongst platforms is expanding at a startling rate and many of them are searching for ways to reinvent the traditional model.
What are commission costs?
Commission costs are the fees associated with buying or selling a certain investment. For example, if I want to buy 10 shares of Apple stock from my broker or online brokerage then I would have to pay a certain dollar amount to execute the trade. Whether I buy 1 share or 100 shares, that commission cost is going to be the same (unless the brokerage offers a scaling effect that lowers the cost for executing more shares.) These commission costs are how brokerages stay afloat and helps to explain their business model: More transactions-More Money
What Are We Accustomed to?
Years before you could ever log onto your computer and execute a trade you had to call up a broker and pay a rather hefty commission cost to execute a trade. You were paying for his labor, his expertise and his resources. Today, the cost of doing business on a trade for an investor is significantly lower because of the commoditized resources, the improvement of technology and increased transparency in the markets.
With the existing online brokerages you can expect to pay anywhere between $5-$20 a trade. The varying costs are functions of the additional services they provide and the breadth of offerings available. While it's no secret that the odds are stacked against the retail investor when it comes to market movements and pricing (Just ask Michael Lewis), there are ways to make it cheaper on the commission side of the game.
Robinhood is one such company out to change the game. A Wall street baby founded in a Silicon Valley era, Robinhood aims to "democratize" the trading process and eliminate all commissions from the equation. Similar to their big competitors, they are a registered broker-dealer, member FINRA & SIPC. They plan to make money through alternative revenue sources such as API licensing, interest on margin accounts and renumeration for trading volumes BUT don't plan on passing the cost of a trade along to your next conviction buy. With a unique business proposition, you would think people would instantly want to give Robinhood a shot...get in line.
You can read more about them here:
If you are interested in opening a brokerage account take a look at: Barron's Best Online Brokerages (March 2014). I personally use Tradeking because they have the lowest commissions in the market ($4.95/trade).