Why $0 Commissions are a Trap!

In early October, the Charles Schwab Corp. sent a shock throughout the industry when they said they would eliminate all commissions on trades for all US stocks and ETFs. This announcement was quickly matched by rivals like TD Ameritrade, E*Trade, Interactive Brokers, and others. It’s a bold move but speaks to the industry trends of lowering commissions that have been occurring for several years. Upstarts like Robinhood and Acorn have introduced low commission trading and these firms had to follow suit.

So why is this a trap for most investors?

The biggest reason people lose money is that they don’t know when to get into a trade or when to get out. You need to determine rules for how much you are willing to lose in each position and how much you are looking to gain as well. Sure, it is possible that this stock can just keep going up forever. Unfortunately, it is not very likely.  For most people, this is why $0 commissions are a trap!

However, it’s not all bad news. One of our favorite advanced strategies will work exceedingly well with zero commissions. With Dynamic Hedging, we are able to repair our losing positions by buying and selling stock. This will allow us to reduce the impact of losers in our portfolio. The fact is that they can’t all be winners but you can control how bad your loss is.

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