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Free securities trading has been a hot topic for some time now and has left many Swiss investors wondering if and when this trend will reach Switzerland. This report by moneyland.ch looks at the facts behind free securities trading and provides useful information for traders.

Brokerage fees have come under pressure around the world. This phenomenon has largely been triggered by fintech startups which seek to claim a share of the securities-trading market by offering free or low-cost brokerage services.

While Loyal3, one of the first platforms to offer fee-free stock purchases, ceased operations in the spring of 2017, apps like Robinhood continue to lead the trend towards fee-free trading. Robinhood lets you trade U.S. stocks and ETFs without paying brokerage fees. Only a negligible stock exchange fee of USD 0.02 per share applies when U.S. stocks are sold. Trading stocks or ETFs listed on non-U.S. stock exchanges generates brokerage fees of up to USD 50 per trade.

Up until now, the Robinhood app has only been available to residents of the U.S. While the average U.S. brokerage fee of USD 10 is already low compared to the average brokerage fee charged by Swiss brokers, interest in the fee-free trading app has been strong.

Can a fee-free broker survive?

How can a broker earn money if it does not charge brokerage fees?

Robinhood is a relatively young startup. It takes the standard Silicon Valley approach of focusing on the needs of consumers and the marketing of its product, while relying on the deep pockets of investors to see it through its growth phase. Thanks to investors like Index Ventures and Andreessen Horowitz, a fintech like Robinhood can afford to develop and market its services until (ideally) it has displaced enough conventional brokers and claimed sufficient market share to turn a profit.

The idea is that once a free broker has acquired a large user base, it can earn money on cross-selling and up-selling securities. Robinhood also expects to earn money on interest paid by traders on loans used for leveraged trading.

Robinhood also earns interest on the money and securities which it holds on behalf of customers and offers a Robinhood Gold package with expanded trading options for a monthly fee.

The engagement of Google Ventures as the most prominent investor in Robinhood says a lot about which companies stand to gain by the digitization of key industries like the financial industry. By getting its foot into multiple markets, Google hopes to diversify its income base which is currently dominated by advertising revenues.

Swiss brokerage fees are relatively high

Swiss securities brokerage services are relatively expensive when compared internationally, largely due to Switzerland’s strict regulatory environment and high running costs.

The costs of trading stocks and other securities in Switzerland have come down on several occasions, triggered primarily by new brokers offering lower fees to gain market share. One of the most recent entrants is IG Bank. The broker which specializes in contracts for difference (CFDs) entered the Swiss market in 2015.

Costs vs. Security

In spite of the fact that brokerage fees charged by Swiss brokers are relatively high, the number of foreign customers opening Swiss brokerage accounts has increased steadily. At the same time, only a limited number of Swiss investors make use of foreign brokerage fees.

As with all services that involve large amounts of money, security often takes precedence over costs. With its established regulatory regime, stable economy, decentralized legal and political system and depositor protection scheme, Switzerland provides an environment which is conducive to the protection of investments.

Will free securities trading reach Switzerland?

What does the trend towards fee-free securities brokerage mean for Swiss brokers? Will fee-free securities trading become the new normal in Switzerland?

While that is a possibility, there are many reasons why it is not likely to happen in the foreseeable future – some of which have already been stated above.

Another factor which hampers the implementation of the fee-free brokerage model in Switzerland is the relatively small market. While U.S. brokerage services can potentially gain the millions of customers needed to turn a profit without charging brokerage fees, Swiss brokers operate in a much smaller and more specialized market.

For example, more than 700,000 prospective users had signed up for Robinhood ahead of its release in 2015. By comparison, the total number of securities traders shared by all Swiss brokers combined at that time was around 400,000, with almost half of those being Swissquote customers.

Swiss custodial fees and brokerage fees compared

There are Swiss brokers which do not charge custodial fees for the safekeeping of securities. CornèrTrader does not charge custodial fees at all, while PostFinance does charge an annual custodial fee but credits this amount towards brokerage fees.

All Swiss brokers charge brokerage fees every time you buy or sell securities. These fees vary between securities brokers. Other factors like the type of security traded, the securities exchange on which it is traded, the number of securities included in a trade and the value of securities also have a significant effect on brokerage fees.

Brokers occasionally advertise low brokerage fees (5 francs per trade, for example). It is important to understand that these offers are generally based on the cheapest possible securities trade and that other costs may apply. It is important to take all relevant costs into account. The online broker comparison on moneyland.ch accounts for all applicable fees and charges.

Most Swiss online securities brokers, including CornèrTrader and TradeDirect, offer demo accounts which let you make simulated trades. Familiarizing yourself with a platform by using one of these demo accounts before you invest real money is recommended. You can request free demo accounts directly from the online broker comparison.

A moneyland.ch report.

More on this topic:
Stock broker comparison
CFD broker comparison
Forex broker comparison
Custodial fees explained
The costs of online trading explained
Tips for new stock traders

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The moneyland.ch magazine provides accurate, unbiased information on topics related to finance and money. In addition to research and expert interviews, the magazine contains numerous financial guides.