‘No real free lunch’
However, at least a few market watchers contend that Schwab’s — and even Robinhood’s — “free” services don’t exactly translate into a net win for the customer.
While the platform doesn’t charge fees, unless one uses its special services like Robinhood Gold,
the cost is actually reflected in the price of the asset being purchased.
For example, if you buy a stock on no-fee Schwab, you place an order. The brokerage sends that buy order — say, for $5 — to a third party. That entity sells you the stock for $5, but the actual cost of it was $4.99. The $0.01 made on that trade is then shared between the third party and the broker.
On top of that, brokers have other ways of making money.
For example, an outside professional trading firm may buy up all the retail-investor orders that come from a broker, be it Robinhood or Fidelity, and executes those trades.
These companies then make money from the gap between the bid and the offer. And depending on whatever they make, the broker then receives payment for the order flow.
“When a company offers something for free... online brokers still make money from you in other ways,” said Investopedia Editor-in-Chief Caleb Silver. “There is no real free lunch.”
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