How interested are people in trading stocks for free? Very.
In early October, after TD Ameritrade said it was switching to zero commissions from $6.95 on most trades, client call volume increased 20% and new-client call volume shot up 40%, the company said.
But that does not mean that there is a whole new cadre of day traders swapping exchange-traded funds (ETFs) every hour, even as the likes of E-Trade, Fidelity and Schwab joined the fray to offer zero commissions.
At Schwab, trading volume actually decreased in October, according to the company.
As investors wade cautiously into this new world of free trading, here is how to make the most of it, as well as what to avoid:
Retirement accounts. Zero commissions will not make much difference in workplace 401(k) plans (or your college savings 529 account), which heavily favor target-date mutual funds that you typically set once and do not trade again until you cash out.
But you could change the way you deal with the existing balance in your rollover individual retirement account (IRA) or Roth IRA, and any new contributions you make, where clients lean more toward low-cost index ETFs.
If you are a once-a-year contributor, you might want to think about stretching that out — known as dollar-cost averaging — so you are not dependent on how the market is doing on any one particular day.
You can also save money rebalancing, which you need to do if market forces sway your portfolio away from your long-term goals.
Investing small amounts. Before October, if you had $100 to save, your options were not good for investing because even a $4.95 transaction fee would eat significantly into your potential returns. You might be discouraged from doing positive things, like saving in your triple-tax-free Health Savings Account or putting just a little bit of money into a Roth IRA.
“One of the first do’s is to make sure whatever cash you have works for you,” said Ram Subramaniam, president of Fidelity Brokerage Services
Emergency funds. Not all cash is meant to be invested, however.
“It’s very prudent to have emergency funds,” said Steve Quirk, vice president of trading and education at TD Ameritrade. But, that said, investors know how little interest they earn on cash. When they see the S&P 500 up more than 20% for the year, they want to participate in that.
“Now you can, at least in a portion,” Quirk said, because with ETFs you can get in and out in milliseconds for no cost.