Trading and investing have become an important part of the business world. There have been so many platforms offering services for online trade and investment. People can access these facilities from their phones. One such platform is E*TRADE, an online leading brokerage firm offering different trading services without any commission. It has completely changed the way how people manage their finances. They offer a wide range of services including investing in securities, taking out loans, and opening savings accounts.
Now you must be wondering how a company generates its revenue when it does not even take any commission for the services they provide. Well, to solve this mystery make sure to read this article. We have got all the answers for you, what is E*TRADE and its origin, how it works, how it makes money, and how they have managed to gain a huge clientele.
What is E*TRADE?
E*TRADE is an online stock brokerage company for investors. It allows investors to buy, sell, and invest in stocks, mutual funds, exchange-traded funds (ETFs), bonds, etc. It even allows its customers to take a loan or save money for retirement. This trading company enhances the overall investing and trading experience by offering portfolio management. The company opens commission-free accounts for its clients which is just a bonus to the reputation of this online platform.
Origin and History of E*TRADE
E*TRADE has its headquarters in New York. The company was founded in 1982 by William A. Porter and Bernard A. Newcomb. Before the advent of the internet, E*TRADE used to offer their services through two other platforms. These were CompuServe and America Online. The firm became widely known after launching other services such as cash management services, student loan benefit administration, online banking, and margin lending.
With the advancement of the internet, E*TRADE made its name. During the late 1990s, more than 500,000 people had signed up for accounts. In 2020, Morgan Stanley took charge of E*TRADE by paying $13 billion. Over one million accounts were added during the same year. There are more than 20 offices of E*TRADE throughout the United States and more than 4000 people are employed there as of today.
How Does E*TRADE Make Money?
All the services provided by E*TRADE are commission free. Now, the question comes how does it make money? E*TRADE makes money in different ways, these include payments for order flow, interest income, commission on trades, service charges, and margin interest. We shall discuss them one by one here.
Payment for Order Flow
When an order is placed by a user on E*TRADE, that particular order is sent to the market maker. The market maker compensates the company for the order flow by the bid-ask spread. When the client’s stock order is sent to high-frequency trading (HFT) firms, E*TRADE earns a fraction of a penny per share. This is a very small amount but when thousands of trade orders are placed every day, the amount gets big. In 2019, the company made $188 million through this business strategy.
Interest Income
E*TRADE grants loans to its clients and then generates profits from the interest on them. The interest rate depends on the account type the customer has. A standard interest rate for a trade is 0.05% however it is 3.75% for a margins account. This is the largest money-making strategy of E*TRADE. In 2019, E*TRADE generated over $1.8 billion in profits by this method.
Commissions on Trades
Although E*TRADE offers commission-free services there are some things for which they cut their commission. Traders must pay for services including options, bonds, and future contracts. On every options contract, traders pay $0.65 and E*TRADE charges a commission on it. For traders who are active and trade over 30 times per quarter, the rate per contract is reduced to up to $0.50. On every futures contract, customers are charged $1.5, and for every bond trade, they are charged $1. In 2019, the company earned $421 million in net commission.
Service Charges
The company generates a large part of its revenue by charging service fees for some special services. These services include portfolio management, retirement accounts, and withdrawal fees. A $25 fee is charged by E*TRADE for premature withdrawal. Customers pay these fees for the management and maintenance of their retirement accounts.
Margin Interest
An important source of revenue generation for E*TRADE is through margin interest. Whenever a client borrows money to buy or short a stock, a margin interest is collected from that amount. For amounts below $10,000, the rates start at 8.95%. If the amount is more than $1 million then the rate is decreased to 5.45%.
Pros and Cons of E*TRADE
Every company has its pros and cons, following are the pros and cons of E*TRADE.
| Pros | Cons |
| Clients can consult with financial consultants and specialists free of cost. | The company has low-grade customer service. |
| This innate platform is great for beginners and advanced traders. | There are no fractional shares. |
| This platform offers substantial educational resources such as articles, webinars, and courses. | There is no access to cryptocurrency. |
| Another perk of E*TRADE is the paper trading feature for investors who prefer to test new investment and trade strategies. | E*TRADE does not offer foreign exchange trading. |
| For futures and options traders, E*TRADE offers outstanding tools and resources. | They do not offer a feature of integrated trade journals. |
Services Offered by E*TRADE
Several services and products are offered by this esteemed firm of online trading and investment. Let us review all the services offered by ETRADE.
Bank Account
E*TRADE offers to open bank accounts for its users. Higher savings and checking accounts are offered to families, individuals, and businesses.
Retirement Account
Special retirement (IRA) accounts are offered to the aged individuals who are 59.5 years or older. These accounts help them manage different types of savings such as tax savings and minor savings.
Brokerage Account
Through this account, users can trade and invest with no or less commission. They can invest in stocks, options, futures, and bonds at a low cost.
Portfolio Management Service
A special service is offered to retail and institutional investors which is the portfolio management service. There are options for managing these portfolios manually or automatically.
Who are the Competitors of E*TRADE?
With the existence of so many FinTech companies, it is hard to keep track of which company is best. Many of these companies offer free online trade just like E*TRADE and give tough competition to them. However, E*TRADE remains one of the best with continuous user growth. Some famous competitors of E*TRADE are:
- Robinhood
- WeBull
- TD Ameritrade
- M1 Finance
- Charles Schwab
Benefits and Risks of Using E*TRADE
The main benefit of using E*TRADE is that it offers an economical way of trading stocks, funds, bonds, and other securities. Another benefit for the customers is access to various resources to manage their investment portfolios effectively.
The main risks of using E*TRADE involve losses in the value of investments, disruptions in the operation of the site or mobile app, and the possibility of cyber security breaches.
Conclusion
ETRADE is an online brokerage firm offering financial services. The company was launched in 1991 by William A. Porter and Bernard A. Newcomb. Investors can invest in stocks, funds, bonds, options, futures, exchange-traded funds, and other securities. Most of the services provided by them are commission free. However, to generate their revenue, E*TRADE uses five types of business strategies including payment for order flow, interest income, commission on trades, service charges, and margin interest. The firm offers special retirement accounts for the elderly. Despite having many competitors, E*TRADE remains the best online investment and trade platform.
Frequently Asked Questions
Here are some common and most frequently asked questions about E*TRADE.
What is the minimum deposit requirement for opening an account with ETRADE?
For opening an account with E*TRADE, the minimum deposit required is $500.
Who is the target audience of E*TRADE?
E*TRADE targets investors who have investable assets worth $50,000 to $500,000 or investors who trade more than 30 times per quarter.
Is E*TRADE a good option for beginners?
It is a great choice for beginners as they offer resources and tools which help them to make good investment decisions and learn more about financial markets. ETRADE is also good for beginners as they can access online investment and trade services at a low cost.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.
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