Five brokers' secrets you should know before trading online

Over 17 million investors with the three largest online brokerages – Schwab, E-trade, and TD Ameritrade – are paying more than $1.8 billion every year on trading fees and brokerage services that most of them don’t need, according to a recent NerdWallet study. Here are five brokerage secrets you should know before trading online:

3. So where does all that extra money go?

Business Wire/File
An E-trade commercial from 2010 features the famous E-trade baby. An analysis of E-trade, Schwab, and Scottrade found that they spend on average as much on advertising as on trade execution.

NerdWallet investigated major brokerages’ official financial statements and found that these major brokerages aren’t spending most of investors’ commission in a way that directly benefits their customers. Instead, the three largest online brokers spent an average 88 percent of their commission fees on nonexecution expenses. Only 12 percent goes toward trade execution, while nearly the same amount is spent on advertising. A whole 24 percent goes to legal and other indirect operating expenses.

By contrast, deep discount brokers Interactive Brokers and Speed Trader spent an average of 59 percent on trade execution with only 7 percent going to advertising and general expenses.

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