An online brokerage lets investors place securities orders and manage accounts through digital channels. It can earn money from customer fees, lending to customers who use margin, and arrangements connected to how it routes or fills orders. Not every brokerage uses every revenue source, so a “$0 commission” headline does not tell you the full cost or how an order is handled.
What an online brokerage does
A brokerage is a service that handles securities transactions. A broker may act on a customer’s behalf, act as a dealer buying or selling for its own account, or do both. “Online” describes how customers access the service; it is not a separate kind of investment. The exact services, investment choices, and fees depend on the firm. Investor.gov’s overview of brokers and brokerage accounts explains the distinction and the kinds of charges investors may encounter.
How brokerages make money
A firm’s revenue can come from several sources, and the mix varies by firm, account, and product. A charge that is not a trading commission can still affect what an investor pays or receives.
Commissions, markups, and account fees
Brokers may charge a commission or markup for a transaction. They may also charge account-service or investment-related fees. The fee schedule can differ by security, service channel, and account, so check the terms for the transactions and services you expect to use rather than assuming one advertised rate covers everything. Investor.gov’s brokerage-account guidance describes these kinds of charges.
Payment for order flow
Some market makers pay a broker to route customer orders to them. This payment, known as payment for order flow, is separate from a commission charged to the customer. Investor.gov gives “perhaps a penny or more per share” as an illustrative possibility; it is not a universal rate or a current market benchmark. The existence of a routing payment raises a potential conflict because the broker receives money connected to where an order goes. Investor.gov’s order-execution explanation discusses routing choices and the broker’s execution responsibilities.
Filling orders internally and the spread
A broker that acts as a dealer may fill a customer’s order from its own inventory rather than send it to another venue. In that case, it may earn the spread between what it paid to acquire a security and the price at which it sells it to the customer. That is a possible business model, not proof that every internally filled trade is worse for the customer; the actual execution price and circumstances matter. Investor.gov explains internalization and order execution.
Interest on margin borrowing
In a margin account, a customer borrows cash from the brokerage against assets in the account and pays interest. Rates and terms are firm-specific. Borrowing can magnify losses as well as gains, and the firm may be able to sell securities if account collateral falls below required levels, subject to the applicable agreement. Review the margin terms before borrowing; the interest rate alone does not describe the risk. Investor.gov’s margin-account guide outlines how margin works and its risks.
Why order routing matters to investors
A broker may choose among exchanges, market makers, and electronic communications networks (ECNs) when handling an order. Receiving payment for routing an order can create an incentive, but it does not by itself establish whether a particular customer received a good or poor fill.
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Brokers have a duty to seek the best execution reasonably available for customer orders. Investor.gov explains that this includes evaluating orders in aggregate and periodically assessing competing markets and venues. Price improvement—an execution at a better price than the displayed quotation—may be possible, but it is not guaranteed. A delay can also matter when prices are moving quickly. Read Investor.gov’s explanation of order execution for more about routing and execution.
The SEC’s guidance on Rule 606 describes disclosures about order routing and payment-for-order-flow or profit-sharing relationships. Those disclosures can help you understand a firm’s arrangements, but they do not establish whether a specific order was better or worse for an individual customer. Use them alongside the broker’s fee schedule and relationship summary. The SEC’s Rule 606 information explains order-routing disclosures.
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How to compare online brokerages
Compare the costs and terms that apply to your likely use, not just the stock commission advertised on the home page. These questions can help:
- What commissions, markups, account charges, transfer fees, or service fees may apply to the securities and services you expect to use?
- How is uninvested cash handled, and what rate or program terms apply?
- If you may borrow on margin, what is the interest rate and what can happen if your collateral value falls?
- Does the firm receive payment for order flow or have profit-sharing relationships, and where can you inspect its order-routing disclosures?
- What execution-quality information does the firm publish?
- What investment choices, research tools, platform features, and customer support are included?
These questions are comparison criteria, not a ranking of particular providers. Rates, account terms, routing arrangements, and program availability vary and can change, so verify them in the firm’s current documents before opening or using an account. For context on a broker’s services and conflicts, see its relationship summary and fee schedule, as well as relevant routing disclosures. Investor.gov’s broker guidance notes that, when making a recommendation, brokers are required to act in the customer’s best interest and not put their own interest ahead of the customer’s.
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