How to Trade Stocks for Free

Investing in stocks is supposed to be about building wealth, but paying trading commissions can slow down your progress. Small fees on stock trades might not seem like a big deal; most online brokers charge $10 or less for each transaction. But keep in mind that's per transaction. If you are just starting out as an investor, or if you have only small amounts to invest at a time, even a small fee can take a big bite out of your profits.

Let's say you want to purchase one share of XYZ Corp., which has a share price of $100. Paying a $10 commission to buy that share means you'll spend $110 for $100 worth of stock. The share price will need to climb 10% just to get you back to even. The math is more favorable if you buy 10 shares in a single transaction. In that case, the share price needs to rise only 1% to earn back the $10 commission. But you'll need to have a grand handy to afford that trade.

The math works out best, of course, if you can buy stocks without paying any commission whatsoever. One way to trade stocks for free is to use a fee-free online trading platform, such as Loyal3. The way it works is pretty simple: You open an account online or through Loyal3's mobile app with absolutely no money. You provide your name, address, employer information, birthday and Social Security number, as well as checking account information to fund your trades. The site boasts bank-level security and is a registered broker/dealer in all 50 states. To start buying stocks, you can invest as little as $10; you have the option to buy fractional shares.

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On top of the free stock trades, Loyal3 gives ordinary investors the opportunity to get in on initial public offerings. That's why Matt Silverman, a 34-year-old software engineer in Bethesda, Md., signed up. A big fan of action-camera maker GoPro (symbol GPRO) as a consumer, he received an e-mail from the company announcing its IPO and inviting customers to invest via Loyal3. He jumped at the chance. "I had seen many stocks in the past pop after their IPO, but as an amateur investor, I didn't have a way to get in on it," he says. "Being able to get shares at the IPO price got me interested in the service." The minimum to buy an IPO is $100.

Loyal3 says it makes its money by charging the companies whose shares it makes available to you, thereby saving you from trading fees. But a drawback to this business plan is that it limits your investment options. For one thing, you can only buy stocks, which makes portfolio diversification a big challenge. For another, you can only buy shares of participating companies. Currently there are 66, including Apple (AAPL) and Facebook (FB), two of the most popular stocks among young investors. Yet another drawback is that Loyal3 pools its orders and executes them only once or twice a day, so you aren't necessarily getting the same the price you see when you place an order.

Purchasing IPO shares also has drawbacks. Since its launch in 2013, Loyal3 has given its users access to 13 offerings, including GoPro, AMC (AMC) and Virgin America (VA). The shares available for each of those IPOs are limited. You have a window of time before the IPO officially launches to set a maximum amount you'd like to invest. Once the price has been established, you have two hours to confirm or cancel your order. Then, depending on how many interested investors have reserved shares, Loyal3 doles out all the shares it has available—meaning you may not get as many as you had intended to buy.

Silverman experienced this limitation firsthand. He initially reserved $2,500 worth of GoPro shares, but he snagged only about 13 shares at the IPO price of $24 each in June 2014. He bought another 40 shares through Charles Schwab on the same day, but at $31.38—and he paid an additional $8.95 commission for the trade.

If you're not interested in IPOs, another option to consider for fee-free trading is Robinhood, and it's a popular one. In August, the service passed the $1 billion mark in transactions, just a few months after its initial launch. The app offers a broader menu of investments than Loyal3, with more than 5,000 stocks and exchange-traded funds available, though it doesn't offer access to IPOs. And of course, the main attraction is its free trades for U.S.-listed investments. (Broker-assisted phone trades cost $10; foreign-listed securities cost $50 per trade.) There are no account minimums.

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Limited-Time Offers for Free Trading

You can also take advantage of promotions through more-traditional online brokers. Our pick for best online broker, Fidelity, is currently offering 100 commission-free trades to investors who deposit $50,000 or more into a new or existing brokerage or individual retirement account. If you have even more to invest, you can nab 200 free trades with a deposit of $100,000 or more. Otherwise, expect to pay about $8 per stock trade.

If Silverman had been new to Charles Schwab when he bought his GoPro shares, he could've saved himself that $8.95 commission. First-time users can earn 500 commission-free online trades for the year by depositing $50,000 within 45 days of opening an account. At TradeKing, you can earn $1,000 worth of free trades with a deposit of just $5,000 within 30 days of opening a new account by the end of 2015. After that, each trade costs you about $5. Check with your own broker or one you're considering using for current promotions. (Also see our online broker center.)

Once you've made your initial purchase of stock, you may be able to buy additional shares directly through the company for free. Many companies offer existing investors dividend reinvestment plans, also known as DRIPs, which allow you to purchase more shares (or fractions of shares) by reinvesting your dividend payments in additional stock rather than receiving the payouts in cash. Such programs may also enable you to get stocks at a discount and buy additional shares with cash rather than reinvested dividends.

But you, as opposed to your broker, usually must be the registered owner of the stock in order to participate. Also be sure to read the details of the DRIP. Some companies charge fees for trades, while others may allow you to make an initial investment directly.

Check www.directinvesting.com for a list of DRIPs that do not charge investment purchase fees. Three attractive companies that offer such plans are 3M (MMM), which we named one of the world's greatest stocks; Abbott Laboratories (ABT), one of our top 25 stock picks for 2015; and ExxonMobil (XOM), one of the best Big Oil stocks for safe dividends.