Loyal3 Offers Free Stock Trading – Is there a Catch? (Review)

Loyal3 is a new broker that allows us to buy stocks at small amounts, often as little as $10 at a time with no fees. They even let us use credit cards. It’s a great way to get started investing and an excellent opportunity to practice dollar-cost-averaging. When something’s free though, there always has to be a catch, right? I’m going to test it out and let you know.

First of all, the catch is in the name, Loyal. The idea here is that investors will be more loyal to the companies that Loyal3 offers investors. These companies are limited to about 30 different brands for which those companies figure brand loyalty is important.

They are willing to cover the trading fees for you to pick up shares of their company and become more tied to their company. This could work and actually make you the investor buy more American Eagle clothing or more Cafe Latte’s at Starbucks.

Although this is a great opportunity there are a few problems worth highlighting that potential investors should be aware of.

First thing is first, this is in no way close to day trading. Investors who make buy or sell orders through Loyal3 will see them executed days and in some cases weeks after you make the decision. This is not unlike direct stock purchase plans, which are often executed on a certain day every month. It is not necessarily a problem if you understand this going in. If you don’t find the stock volitle and want to hold on long term it’s fine for the money saved.

The second problem is the lack of diversification in building a portfolio around these companies. Loyal3 might get better over time but for the most part these are consumer discretionary stocks. These are companies that produce products or services in clothing, fast food, entertainment, etc. These can be part of a diversified portfolio but by themselves are very one sided.

Loyal3 does not offer any bio-techs, financials, utilities, natural resources, et al. Some tweaking can be done to get close to diversification but if you plan on opening an account with them and this is your first time investing you make experience some wide highs and lows on your earnings.

The third problem is that Loyal3 banks on you being a customer of their IPO program. The program is intended to get young investors or those without much capital involved in an IPO which is often left for the big time investors. This in itself is not inherently bad, but the vast majority of IPO’s fail and it looks like based on the ones they have offered so far – AMC and Twitter – they are geared towards young people in fashionable and techie ways. Again, not necessarily a problem but, stocks like these have a bad record overall and must be very carefully considered before jumping in.


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