What is commission-free trading?
Updated
August 28, 2024
We explain what commission-free trading is and how it works.
It’s the world of finance after all and we love a new name.
In this guide, we’ll explain the ins and outs of what commission-free means, how it works and whether you can actually trade stocks for free in the UK.
Before we start, it’s important to understand that the value of your investments can fall as well as rise, so you might get back less than you originally invested.
When you buy and sell shares you don’t go to the stock exchange yourself, a stockbroker does that for you. This is because stockbrokers are the ones best set up for it in terms of regulation, tech, systems etc.
‘Commission’ is the fee charged by some stockbrokers in the UK (and elsewhere) for this service. And the amount of commission depends on which broker, investment platform or trading app you invest with in the UK.
‘Commission-free’ trading or ‘commission-free investing’ just means the broker doesn’t charge you for the service of buying or selling shares. And the benefit is that more of your money gets spent on investing rather than fees.
It’s worth noting though, that when you buy overseas shares in the UK, for example, US stocks or European shares, it’s likely you’ll also have to pay a foreign exchange charge too. This is not commission but it does happen at the same point (i.e. when you buy or sell).
Like most things you buy overseas, you have to buy in the local currency and whether it’s your holiday Euros or your European shares, there’s a charge to exchange pounds into euros. This cost is initially paid by the broker but it’s something most brokers pass on to the customer to varying degrees.
This is best explained with an example.
Let’s say you want to buy shares in a UK company and you’re deciding which broker or investment platforms to go with. They are imaginatively named Broker A and Broker B.
Broker A charges a commission of £10 per trade but Broker B offers commission-free trading.
Here’s an example of what zero commission looks like in action:
Commission is really just the price of a service but it’s important to be aware of it because it has an immediate impact on your investment’s performance and returns.
Using the same example, your share with Broker A cost £10 more, so you’re already behind a share bought with broker B by 10%.
Our investment fees calculator can help you compare the cost of commission and in turn share dealing across different platforms.
Hopefully, by now the advantages of buying shares commission-free are clearer.
If you don’t have to pay any commission when you buy shares, more of your money goes towards investing. With no commissions when you sell shares, any gains go straight into your pocket as opposed to your brokers.
It feels a good point to remember that investment gains aren’t guaranteed, all investments can rise as well as fall in value.
Commission-free trading is on the rise in the UK but it’s still not offered by every broker. Given that, you are right to wonder what allows the stockbrokers who do offer commission-free trading, to do so.
The first big factor is cost.
Stockbrokers come in all shapes, sizes and ages. And, as we see in many other sectors, newer technology-led businesses often run a lower-cost business model than the older players thanks to fewer legacy systems and processes.
The other key aspect is how the broker charges its clients. It’s a good idea to understand how a broker or investment platform makes money (and if it makes money, is it an established player?) before you invest with them.
One example of a charging structure is a freemium business model. And just like many other subscription businesses, from music to magazines, there is a certain level of the product or service you don’t pay for but if you’d like more variety or a different feature then that comes at a cost.
There are quite a few other business models out there, so it’s important to check how they work and whether it’s in your best interests.
Freetrade’s business model falls into the freemium camp.
There’s a level of the service we don’t charge you for, like having a general investment account with us as part of our Basic plan, and then it’s up to you which other accounts and benefits you’d like to pay for.
Here’s a breakdown of things we currently charge for:
From May, monthly subscription fees will change to £5.99 per month for our Standard plan and £11.99 per month for our Plus plan.
You can see more info on our pricing here.
Understanding if there’s a catch with any business comes down to understanding how it makes money. Be it fashion or finance, it’s the same question and the company should make the answer clear to you.
For many zero-commission trading platforms, there is no catch. They are upfront in how they make money in order to be a sustainable business. Most often, by charging for other investment accounts or annual management charges.
However, when looking into zero-commission providers you’ll likely find that many lean heavily on the ‘free’ bit. Common examples are ‘free share trading’, ‘free trading platform’ and ‘free trading app’.
It’s worth keeping the mind there’s no such thing as a free lunch, it might not cost you anything to buy or sell shares but you can be sure that not everything is free. After all, a business has to be sustainable somehow.
When it comes to choosing a commission-free trading app or any investment provider for that matter, we think it’s best to think in terms of two things: features and fees.
For features here are some useful questions to think about:
When it comes to fees, it’s important to understand how you’ll be charged.
Here are the fees to understand:
Keep a particular lookout for any percentage account fees. If your investment pot grows, your account fees will too and this will impact your investment’s performance.
Commission-free investing can be a good option for all types of investors, beginner, experienced or in between.
The key benefit of commission-free investing is that more of your money goes towards your investments instead of commissions.
However, as mentioned above it’s important to understand how the platform can provide commission-free trading.
This will vary platform by platform.
With Freetrade all investments are commission-free, whether that’s US, UK or European stocks, fractional shares, ETFs, investment trusts or REITs.
This will vary by platform.
However, when you buy and sell stocks commission-free with Freetrade, there is no limit, every trade is commission-free.
Buying and selling shares is commission-free but there are two other charges to be aware of.
Account charges
Having a general investment account is free with the Basic plan but other investment accounts such as ISA and SIPP are part of our paid plans - see how our plans compare.
Foreign exchange fees
When you buy overseas shares you will pay a small foreign exchange fee. This FX fee is 0.99% on our Basic plan, 0.59% on our Standard plan, and 0.39% on our Plus plan.
See our full pricing table. Commission-free trading, zero-commission investing and 0 commission trading. Depending on where you look, you’ll likely see ‘commission-free’ given a slightly different twist.
