This is how cheap brokers earn their money

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Cheap brokers like Trade Republic, Scalable Capital Broker or Just Trade have made trading stocks and ETFs easier and cheaper. But how do they do it with the fees exactly – and what does it really cost the investor?

your name is Scalable Capital Broker *, Trade Republic *, Just Trade *, Finanz.net zero (formerly free broker) or Smart broker – and yet they are all based on the same model: the US low-fee broker Robinhood, who has been promising investors and savers free or at least commission-free trading and investing since 2013. But how do the neobrokers, also known as cheap brokers or low-fee brokers or no-fee brokers, earn their money and how can the business model pay off?

On the one hand, the customer buys this with a limited selection of securities, which can be sufficient, because all common markets and indices are offered and supported in the ETF universe. While only ETFs from certain partners can be traded with Trade Republic and Just Trade, the range of products offered by Smartbroker and Scalable Capital is not restricted as long as the securities are approved in Germany.

On the other hand, as a customer, one buys the low fees through the limited selection of trading venues compared to many conventional direct banks. You can think of it as a limited selection of shops in which you can buy certain goods at the price valid there. If you at an average direct bank have the choice between all in Germany and Western Europe as well as some large international stock exchanges, some automated and a few over-the-counter cooperation platforms of the bank, things look different with cheap brokers: Whoever trades at Trade Republic does so exclusively via that The electronic trading system LS Exchange operated on the Hamburg Stock Exchange. The price quality is monitored on the exchange, however, and the spreads are linked to the Xetra reference market, provided the security is tradable there. With Finanz.net Zero you also have to rely on a trading platform, in this case Gettex.

With Just Trade the investor can choose between LS Exchange, Quotrix and Tradegate as well as some fund companies directly, with Scalable Capital trading takes place via the automated trading platforms Gettex and Xetra. The largest selection is offered by smart brokers with Xetra, Tradegate, Quotrix, LS Exchange, Gettex as well as direct trading and all regional stock exchanges in Germany and some international stock exchanges. Attention: In all cases in which Xetra trading is offered, the price is a little more complicated – whether cheaper or more expensive depends on the order size.

In addition, many low-fee brokers incur smaller fees for processing the respective order. With Scalable Capital, for example, they cost 99 cents per order for all securities that are not discounted in a certain Prime group, with Trade Republic there is a handling fee of one euro for each order, regardless of the security, while Smartbroker charges For example, when trading on the Lang & Schwarz trading center, one euro, with other stock exchanges, four euros. Finanz.net Zero, on the other hand, as the name suggests, does not charge anything if the trading volume is over 500 euros. In some cases there are also monthly fees of a few euros, which then mean that all orders placed during this period are free of charge (but taking the spread into account). This can be worthwhile if, for example, you make more than one or two purchases a month or regularly save savings plans. The bottom line is that all of this is significantly cheaper than with conventional banks, which in most cases also receive internal commissions from the trading venues or the fund companies.

A savings tip for investors who regularly invest in the same paper and want to take the cost-average effect with them are savings plans. They can be saved for free at Trade Republic, for example, and the first savings plan is always free at Scalable Capital Broker. The cost-average effect describes that if you regularly buy a smaller amount, you bear less risk of buying at a particularly unfavorable time (but vice versa, but also not buying at the optimal time).

In addition – and this brings us to the actual costs – fees are of course incurred via the spread, i.e. the difference between the actual buying and selling price that a trading venue charges. This cannot be changed by the platform, the broker, but the broker receives a reimbursement for each trading transaction from the operator of the trading venue, which the broker must correctly point out (and this must also be done by the Bafin).

An initially existing difference between the low-fee brokers and established banks and direct banks was the type of trade. Some of the low-cost providers initially only offered the option of accessing the account using a smartphone app – this was so unusual for many experienced customers that all providers except Trade Republic have now decided to use a desktop solution in addition to the mobile app to offer for the browser. The background: Every platform, every front end that a bank or a fintech has to maintain and develop more causes costs that have to be passed on to the customers.

The providers are also concerned with avoiding costs when it comes to support. Many of the low-cost brokers only offer support via e-mail or, at best, via chat, while Scalable Capital and Smartbroker also have the usual telephone support if need be. There is no difference to the established banks when it comes to the order supplements: Regardless of whether you want to place a stop-loss or stop-limit order, you will find what you are looking for on the platforms mentioned, as long as the respective trading venue supports it.

Does a low-cost broker make sense in terms of the fee structure if you, as an investor in stocks or ETFs, want to save your retirement savings or not? Yes, absolutely – in most cases you will get the securities you are looking for here. For example, if you are looking for an ETF on common indices such as the MSCI World, the Dax or the Nasdaq, you will find suitable solutions with each of the brokers. You should also always find what you are looking for with stocks.

But if you are looking for, let’s say, a special asset management ETF from Vanguard from the Life Strategy series, there are only a few low-fee brokers available as a savings plan. The low-fee brokers are similarly suitable for stock trading: Here you will get away with the restrictions mentioned comparatively cheaply, especially if you invest smaller amounts. However, if you want to go in the day trading direction and do this with unusual papers, there are other solutions that are more suitable. Because of their simplicity, low-fee brokers are suitable for all those customers who have never come into contact with financial investments before. But it is precisely for them that the following applies: inform in advance and do not just rely on the half-knowledge of acquaintances.

Which broker is the right one for you cannot be said in general terms. A few recommendations can also be made as part of a comparison of the five German low-fee or cheap brokers mentioned: If you are looking for a particularly large number of trading venues to trade for little money, you can take a look at Smart broker throw. Finanz.net zero is interesting for everyone who gets by with a trading platform but does not want to pay handling fees for it. They are easy to use and offer a wide range of tradable securities Scalable Capital Broker * and Trade Republic *, both of which also have free savings plans for a four-digit number of ETFs.

By the way: All of the cheap brokers mentioned are subject to the German banks’ deposit protection fund either directly or through the cooperating bank. The stocks and funds invested are included in the special fund anyway and are therefore not at risk in the event of problems with the bank, the cash deposits, i.e. the money that is in your deposit account for investing, is also secured (at least) up to 100,000 euros per customer.

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