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An online brokerage lets customers buy and sell securities through a website or app. It may earn money from customer charges such as commissions, markups, and margin interest, as well as from arrangements connected to order routing. The mix varies by firm and product, so a headline offer of “$0 commissions” does not necessarily mean every service is free.
What an online brokerage does
A brokerage is a service that handles securities transactions for customers. A broker may act as an agent in a customer’s transaction, trade as a dealer for its own account, or do both. “Online” describes how the service is delivered; it is not a separate kind of investment. Investor.gov explains the roles brokers can play.
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Brokerages differ in the investments and services they offer, the charges they impose, and how they handle and route orders. The specific terms in a firm’s fee schedule and account documents matter more than a general label such as “online broker.”
How an online brokerage can make money
These are possible revenue sources, not a checklist that applies to every brokerage. A firm’s revenue model can vary across products and services.
Commissions, markups, and other customer fees
A broker may charge a commission or markup for a transaction. Customers may also face account-service or investment-related fees. Which charges apply depends on the firm, security, and service; check the fee schedule rather than assuming one price covers every transaction or account activity. Investor.gov outlines common broker charges.
Payments connected to order routing
A broker chooses where to send an order, such as an exchange, market maker, or electronic communications network. A market maker may pay a broker to route orders to it, an arrangement known as payment for order flow. That payment is distinct 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-wide benchmark. Investor.gov explains order routing and execution.
A firm may also fill a customer’s order from its own inventory, a practice called internalization. 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. This does not by itself establish whether a particular trade was well or poorly executed.
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Interest on margin borrowing
In a margin account, the brokerage lends cash secured by assets in the customer’s account and charges interest. Rates and terms are firm-specific. Borrowing can magnify losses, and if account collateral falls in value, the firm may sell securities under the account agreement. Review both the interest rate and the firm’s rights if collateral becomes insufficient. Investor.gov describes margin accounts and their risks.
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Why “commission-free” does not mean cost-free
A low or zero commission describes one possible direct transaction charge; it does not answer every question about the cost or execution of investing. Other account or investment-related fees may apply, and an order may be routed through arrangements that generate revenue for the broker. A brokerage that lends to customers on margin may also earn interest from those loans.
Order-routing payments create a potential conflict because a broker can have a financial incentive related to where it sends orders. But the existence of such a payment does not alone show that a customer received a worse fill. The broker has a duty to seek the best execution reasonably available and to assess competing venues. Price improvement may occur, but it is not guaranteed; in a fast-moving market, execution delay can also matter. Investor.gov discusses best execution and execution quality.
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When a broker makes a recommendation, Investor.gov says brokers are required to act in the customer’s best interest and not put their own interest ahead of the customer’s. That statement concerns recommendations; it should not be treated as a claim that the same legal standard applies to every brokerage activity.
What to check before choosing a brokerage
For a US brokerage, use the firm’s documents and disclosures to understand the terms that are relevant to how you plan to invest. A relationship summary can help explain the firm’s services and conflicts; a fee schedule and account agreement spell out costs and terms. SEC Rule 606 disclosures provide information about order routing and payment-for-order-flow or profit-sharing relationships. Investor.gov explains broker-dealer information and registration.
Best Value
- Charges: Which commissions, markups, account charges, transfer fees, and service fees apply to the securities and services you expect to use?
- Uninvested cash: How is cash in the account handled, and what rate or program terms apply?
- Margin: What interest rate applies, and what can the firm do if collateral value falls?
- Routing: Does the firm receive payment for order flow or have profit-sharing relationships? Where can you review its routing disclosures?
- Execution and service: What execution-quality information does the firm publish? What investment range, research tools, platform features, and customer support are included?
- Registration: Verify the firm’s registration and review its relationship summary rather than relying only on marketing claims.
Terms such as rates, account fees, and routing arrangements can change. The SEC and Investor.gov sources cited here explain the mechanisms, but do not establish current terms or rank particular brokerages. Verify those details with the provider before opening an account.
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