It can be confusing to understand how a broker makes money. Many traders focus their decision on whether to trade with a particular broker based on their business model, without necessarily understanding mechanics. In this article, we examine how Trading 212 makes money and what it means to you.
Trading 212 is a popular broker, and the growing interest in this company leads us to prepare this article and explain how the company makes money. To find out why more traders are choosing this broker, you can read our comprehensive Trading 212 review.
So, how does Trading 212 make money in practice?
There are three ways Trading 212 makes money. Firstly, Trading 212 is a hybrid market maker broker with NDD service; the broker acts as a counterparty to clients’ orders and operates an order book by matching buyers and sellers internally. Secondly, there are commissions and spreads applied when trading CFD products. Thirdly, non-trading fees for overnight positions or deposits greater than $2,000.
Now you’re probably wondering why Trading 212 claims to not charge trading fees. Well, that’s because they actually charge no fees on certain assets, and they make money in other ways.
If you’re still in doubt, you can always open a free Trading 212 demo account in order to double-check everything we have stated (83% of retail CFD accounts lose money).
Market Maker model
A market maker broker creates an internal market where traders’ orders are executed and either matched or netted off against other traders. With a market-making model, technically, the brokers are the counterpart of your trades; this means if you lose, the broker theoretically wins. This is why some traders don’t easily trust market-making brokers and therefore why transparency from Trading 212 is essential.
In fact if you visit the Trading 212 website, you can find a comprehensive Company Overview webpage (83% of retail CFD accounts lose money) where you can find all you need about the company regulatory environment.
Just because you lose doesn’t mean that Trading 212 has profited. As mentioned, orders are either netted or matched. Just because one trader buys and another one sells, doesn’t mean one will profit and the other will lose; it depends on timing and when those traders close their positions. Markets oscillate, meaning both traders could win, and they both could lose. The process of market making is very complex, but the main point to take away is that it’s not a binary outcome: the trader loses, so the broker wins and vice versa.
Trading 212 tries to keep trading commissions to a minimum, and it does an excellent job at offering competitive trading conditions. There isn’t even an inactivity fee since your trading account won’t reach inactive status providing it contains some funds.
Just like other brokers, there is an overnight fee for positions carried over the following day. This fee varies depending on the day and the asset traded, and is freely available to be consulted at the Trading 212 CFD Instrument webpage (83% of retail CFD accounts lose money).
Under certain conditions, there is also a fee on deposits. If you deposit to your account with any method other than bank wires and exceed the $2,000 limit, the broker will charge a fee of 0.7% against your deposit. Remember, there are always conversion fees if you deposit in a currency that does not match your account’s base currency.
CFD Spreads and Trading Commissions
When trading CFDs with Trading 212, you will pay a commission on each side of the trade. Once when you open the position, and once again when you close the position. When an order is executed, you automatically pay the spread. With Trading 212, you will be offered either a fixed spread and a floating spread account. The difference is that a fixed spread is set by the broker and rarely changes. A floating spread dynamically changes according to market conditions. Some traders prefer fixed spreads so they can effectively calculate their trading costs. Other traders prefer floating spreads so they can benefit from lower spreads at certain times of the day.
Having said all that, you may notice that Trading 212’s spreads are relatively high compared to other brokers. All this should have given you an overview of how Trading 212 makes money. If you’re still unsure whether you should trust this broker, you can visit the website of Trading 212 (83% of retail CFD accounts lose money), have a look around, and open a free demo account in order to take your time examining how the broker operates.
How does Trading 212 make money on Commission-Free accounts?
With a commission-free trading account, Trading 212 simply does not earn money on trading commissions in this case. However, it may profit or lose money accordingly to the customer trading activity. Since commission-free stock trading, such as the type offered with the Trading 212 Invest Account, is far less risky than CFD trading, it is most likely a minor source of the company’s income.
It’s worth keeping in mind that not every stock offered by Trading 212 is commission-free. In this case, Trading 212 earns money just like any other broker. However, thanks to the income generated from other trading products, Trading 212 can facilitate real-stock trading without charging commissions. Even though fees are low, every trader contributes to this when paying any type of fee, whether in the form of a commission or not. As a result, the broker can offer no commissions on Invest Accounts without concerns.
How can Trading 212 be free?
The commission-free trading service provided by Trading 212 is actual stock trading. Other products and account types have various fees. To gain access, you will have to open a Trading 212 Invest Account dedicated to trading stocks. With this account, you will have over 3,000 stocks across seven international exchanges, as shown in the image below.
However, Trading 212 is not entirely free:
- Stocks from certain exchanges still charge a fee.
- CFD accounts are not commission-free in any way.
- You have to deposit a certain amount of money ($1 at least) to open a real trading account.
- You may incur a 0.7% funding account fee if you deposit more than $2000 via certain payment methods.
- You may incur a conversion fee if you cannot fund your account in EUR or USD.
So, why does Trading 212 offer commission-free shares?
There are a few reasons that Trading 212 probably offers commission-free stock trading:
- They use commission-free stock trading to attract new customers and offer a better service more compelling than their competitors. Moreover, commission-free shares are an excellent alternative to CFDs for new traders since they are considered lower risk.
- There is less struggle to break even since there are no commissions charged.
- There is a lower speculation risk since you can hold them long-term without worrying about getting charged rollover fees every day.
Although commission-free stock trading is less risky than trading stocks with CFDs, you should always start by opening a demo account first.
How does trading 212 make money? | FAQs
Is Trading 212 a con?
Trading 212 is not being misleading by claiming it offers commission-free trading for the reasons explained in this article. It is a legitimate broker, highly regulated by the FCA, which also offers a customer compensation scheme of up to £85,000.
Do you get dividends from trading 212?
Dividends are processed automatically and paid directly to your account. To qualify for a company’s dividend payment, you need to have purchased the shares before the ex-dividend date and hold them on that date, but not necessarily until the end of the ex-date.
Is trading 212 actually free?
You will encounter commission-free trading only when trading real stocks and ETFs using a Trading 212 Invest Account. We recommend reading our Trading 212 review to understand the differences between account types.
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