An Introduction to US Brokerage Stocks

If you want to buy and sell stocks in the exchange, you will definitely need to have an existing trading account with a stock brokerage firm before you can transact either via its online brokerage platform or mobile phone application. I would like to introduce you to 3 US brokerage stocks that you can look at if you are interested in this particular industry. Now, before we go into this 3 US brokerage stocks, there is something you need to know about brokerages. Brokerages make money through trading activities. so the more trading activities a brokerage has, the more commissions it makes. you can think of them as a ‘volume’ businesses.

Interative Brokers (Nasdaq: IBKR )

Interactive Brokers LLC  (IB) is a US-based brokerage firm. It operates the largest electronic trading platform in the US by number of daily average revenue trades. The company brokers stocks, options, futures, futures options, forex, bonds and funds. There are basically 2 business arms within Interactive Brokers: the market maker arm and the brokerage arm.

As a market maker, IB needs to be ready every  second of the trading day with a bid and ask price to ensure there is always a buyer and seller at any point of time. IB makes the spread between the bid and ask price.  Over the years, IB has been winding down its marker maker arm and selling its subsidiary to Two Sigma in 2017. As such, the market making part of the business form a very small part of its total revenue. Therefore, when analaysing the company, you can choose to neglect this part of the business.

As a brokerage firm, there are basically 2 ways IB makes money:

  1. Commssions
  2. Interest Income

At this present moment, the biggest revenue contributor comes from interest income, which comprised of 73% of IB’s total revenue in 2018.

Economic Moats

1)Cost Advantage

Interactive Brokers has the lowest fees in the industry- only US$2.17 per equity trade. IB also has the lowest margin loan rates in the industry at less than 4%; the rest of the industry are doing 5% upwards. This in itself is a huge draw for traders who like to trade with margins.

2) Intangible assets – Regulatory License & Patents

The brokerage industry is a highly-regulated industry. Before one can start a brokerage, one needs to have a high capital base and high liquidity. Getting a brokerage license and regulatory approval in different countries requires time and effort. To date, IB has already established itself in 26 different countries and trade in 22 different currencies. In addition, as a fintech company, IB has built and patented its IT systems since 2011, so its competition cannot simply copy IB’s system and start competing with them

Charles Schwab Corporation (NYSE: SCHW)

Charles Schwab (CS) provides financial services such as banking, brokering, financial advisory and financial product (stocks, bonds and funds) to 2 groups of people:

1)Business to Business (B2B)

2)Business to Consumer (B2C)

For B2B, CS acts as a platform for financial advisors to provide financial products and services to their respective clients. And for B2C, as long as you are a DIY investor or a corporation who purchases stocks, bonds or funds via CS on your own terms, you are classified as a B2C customer.

Charles Schwab is pretty similar to IB in the way its makes money from interest income and brokerage commissions. The only difference comes in the form that  of its fund management services to its clients. When clients invest in its funds, CS charge a recurring fee for the total assets under management (AUM). The larger the AUM, the more fees CS collect.

Economic moats

1)Cost Advantage

Usually as an online broker, you are into the volume game. As such, you will want to position yourself as a low-cost provider. Over the years, Charles Schwab has tried to stay competitive to the markets by reducing their commissions. In this aspect, IB is still coming out top as  it is currently the low cost leader.Even so, Charles Schwab is still one of the largest banks and brokerage firms in the US and position itself as a one-stop solution to their clients’ financial needs (something different from IB) with their wide range of products and extensive distribution networks. In a way, CS is able to reap economies of scale by bringing in new products and services at lower cost as their operating cost can be spread across a larger customer base.

TD Ameritrade (Nasdaq: AMTD)

Like IB, TD Ameritrade (TD) also competes in the online brokerage segment. I have pretty much nothing more to day about its business as it is very similar to IB’s business model. Over here at journeywithmoney, we must confess that we are users of its think or swim trading platform which brings me to talk about another economic moat which I have yet to talk about.

Economic Moats

1) Switching cost

Some traders might tell you that once they are accustomed to a certain trading platform, the likelihood of them sticking to the platform is very high. As such, we can see that if an online broker is able to get their platform offering right, there will be a certain amount of customer’s stickiness and loyalty. Another thing to add is once you have accumulated positions using a particular platform, there is also a certain inertia to switch out as transfer of stock holdings can be quite a hassle. Going by this same argument, I am also able to say to a certain degree that IB and CS would have this particular moat too.


The purpose of this article is to give our readers a understanding of the types of economic moats a brokerage firm can have. If you are interested in investing in the brokerage industry, you must also be sure to take note of the federal interest rate too. Companies like IB, CS & TD makes more money when interest rates goes up as higher interest rates means higher interest income for them. Lastly, if you are interested to learn how you can invest in the US stock market, do come join us at our next Stock Investment Coaching class happening on 25th July. On the day itself, we will be showing how you are able to sell options to generate premiums for yourselves.

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