Free Trading: A Greater Temptation to Overtrade?

by | Dec 2, 2014 | Asset Management, News

A trend that’s been taking place for years now is lower overall costs for investors. This is a great thing. Whether we’re talking about lower trading commissions at discount brokers or lower cost funds like ETF’s, this is generally good news for investors. In fact, we may even see free trading become a real trend in the near future. Currently, discount brokers (like TD Ameritrade, Schwab, and E Trade to name a few) offer trades with commissions under $10. Pretty good when put into the context of what trades used to (and often still do) cost at full service brokerage firms. Free trading platforms are starting to become more common too. The costs associated with investing continue their downward trend, benefiting the investor.

Recently, Tadas Viskanta of Abnormal Returns put together a post about the potential effects free trading may have on investors. Tadas explains that:

“Free trades will certainly tempt many to try marginal trades that they would not have considered previously. The big risk isn’t that they will lose on these trades, although that is a real issue. The big risk is that they spend their time and emotional capital on these trivial trades and miss more promising “perfect pitches” that have real opportunities for gains.”

This interesting point raised by Tadas made me think of the quote, “With great power comes great responsibility”. The ability to access free trading will be a good thing for investors from a cost standpoint. Paying less in commissions means more money actually getting invested and going to work for them. However, the danger that might come with this ability is abusing it. When trades cost an investor nothing, it potentially removes a barrier that may have previously deterred them from making a change. A change that may or may not be necessary. This means investors will need heightened self-control and awareness, something that’s easier said than done. This could certainly lead to more investors getting caught up in short-term, unprofitable trades, like the “trivial trades” described by Tadas above.

Determining when it’s the right time to make a trade and when it’s the right time to sit tight isn’t easy. Here at Mullooly Asset we always stress that there are times to buy investments and to sell them. It’s important to stack the odds in your favor when investing and sometimes doing that means sitting tight, other times it means making a change. There’s a sweet spot in between overtrading and never selling. As Tom likes to say about our point and figure charts, “When the charts change, we will change”.

So with the great power of free trading on the horizon, investors must be ready to take on the great responsibility of not overtrading in their accounts.


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