Ask the Fool
Free Trading Commissions
Q: My brokerage has just announced that online stock trades will now cost $0. Is that sustainable?
— H.R., Pawtucket, Rhode Island
A: It certainly can be. Once a brokerage has its trading technology set up, it doesn’t cost a lot to execute trades.
Keep in mind, too, that trading commissions are not the brokerage’s only source of income. Like banks, brokerages get a lot of money from “net interest” — the difference in the interest rate they pay customers for cash deposits and the interest rate they earn when they invest customers’ cash. They also collect interest when investors borrow funds with which to buy stocks (“on margin”). Many brokerages these days are also generating income via asset management — offering research and advice to customers.
Then there are fees: These include fees for “account maintenance,” paper statements, inactivity or when you buy or sell mutual funds. There’s also income to be collected from the difference, or “spread,” between a stock’s “bid” price (what an investor is willing to buy the stock for) and “ask” price (what a seller is willing to sell it for).
Q: Are Social Security benefits going up much in 2020?
— C.L., Portland, Oregon
A: The cost of living adjustment (COLA) for Social Security in 2020 is 1.6%, considerably lower than 2019’s 2.8% increase. With the average monthly retirement benefits check recently at $1,475, a 1.6% increase will mean $23.60 more per month, or about $283 more annually. It’s not a lot, but in retirement, every little bit can help.
You can learn more about Social Security and how you may be able to increase your benefits by searching for the terms “Social Security” and “Motley Fool” in Google.
My Dumbest Investment
Pumped and Dumped
My dumbest investment was buying a pump-and-dump pharmaceutical stock when it was in full “pump” mode. Seemed like a good idea at the time — ha! — T.N., online
The Fool responds: You fell for a classic kind of stock market con. It’s typically penny stocks (those trading for less than about $5 per share) that are involved in pump-and-dump schemes, because they have relatively few shares available for trading, and they’re easy to manipulate.
Here’s how the schemes work: A con artist buys a bunch of shares of a certain stock and then starts hyping it — online or via email, phone or some other way. (For example, the messages might suggest that the company is on the verge of curing cancer, or striking oil or gold, and that buying shares immediately will result in big profits.) This increases demand for the stock, as gullible investors snap up shares, and that drives the price up, benefiting the scammer. The scammer then quickly unloads all of his or her shares for a hefty profit; that selling activity sends the shares plunging, wiping out the trusting investors who fell for the hype.
You can avoid this danger in the future by ignoring any communications you receive about low-priced stocks that are supposedly about to skyrocket. If it’s already skyrocketing, there’s a good chance it’s about to plunge, once the fraudster starts selling. Stick to larger companies, ideally those with proven track records.
The Motley Fool Take
Southwest Should Take Off
The airline industry has historically been a lousy one to invest in. It’s sensitive to the economy, capital-intensive, highly regulated and hypercompetitive. Poor management decisions have led to numerous airline bankruptcies over the years. But Southwest Airlines (NYSE: LUV) has remained profitable for 46 consecutive years — even now, despite the grounding of its 737 Max planes.
This isn’t as bad as it seems: Southwest should eventually receive substantial compensation from Boeing to offset its lost profits — most likely in the form of discounts on future aircraft deliveries. And the aircraft shortage has forced Southwest to make tough choices about which markets are working and which ones aren’t.
Meanwhile, Southwest recently posted some record results in its third-quarter earnings report, with net income up 7% over year-ago levels. There’s a lot more to like about this airline. Start with its business model of simplifying by primarily using a single kind of plane — the Boeing 737 — and favoring direct point-to-point flights instead of using industry-standard hub airports for connections.
Southwest’s dividend recently yielded 1.2%. It’s growing rapidly, too, having tripled over the last five years. If you can handle some volatility from the industry, give Southwest some consideration as a long-term investment. (The Motley Fool owns shares of and has recommended Southwest Airlines.)