In Short
There are 2 main ways that a brokerage house makes money. Those ways are through commissions and interest on cash balances.
Commissions
This type is what most people automatically think of when it comes to this topic. Every time a stock, ETF, mutual fund, or any other security is bought or sold, a commission is paid to the brokerage house. Depending on the particular brokerage house that commission could be a few pennies or hundreds of dollars. The commission costs of the broker you use should be fully disclosed on their website.
Interest on Cash Balances
When you have a brokerage account open, any cash that is within the account doesn’t just sit there. It earns the account owner (you) interest, and it earns the brokerage house a higher rate of interest. Very similarly to a bank, they’ll loan that money out (usually in the form of margin accounts) and the difference between the interest they pay and the interest they receive is their profit. Information on both types of interest can be found on the brokerage house’s website. The interest they earn can be found by looking at how much they charge on margin accounts.
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?
