In their never ending quest to find the most rewarding investments, investors often forget that the best ones may be right under their noses. With millions of investors buying and selling shares, option contracts and a host of other securities products, it may be time to consider making a bet on market activity.
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When It Pays To Be Active
To most value investors, inactivity is the way to prosperity. As Warren Buffett often remarks, one or two good ideas a year can deliver market-beating results. However, there is one exception in which investors would prefer lots of activity. Every securities trade has to be done via a broker, be it full-service or online. So why not consider investing in those businesses that simply profit on activity? A brokerage firm makes money every single time a trade is done. Whether investors are selling at a loss or gain, the broker collects a tiny little toll fee which cannot be avoided.
Small Fees On Loads Of Volume
Unlike an actual toll bridge, investors have many choices in deciding who to use in trade execution. The two most well-known publicly traded online brokers are E-Trade (Nasdaq:ETFC) and TD AmeriTrade (Nasdaq:AMTD). E-Trade, unfortunately, is no longer a pure play online broker and its forays in banking and mortgages have plagued the company. As the company's full name implies, it's more of a financial services company.
However, a nifty little play on market activity is Interactive Brokers (Nasdaq:IBKR), an operator of a global electronic market and broker. It engages in routing orders and executing and processing trades in securities, futures and foreign exchange instruments on approximately 80 electronic exchanges worldwide. The company provides bid and offer quotations on approximately 557,000 securities and futures products listed on electronic exchanges. At just under 12-times earnings and over 50% operating margins, investors can participate in a company that benefits from market activity. A similar business, The Charles Schwab Corporation (NYSE:SCHW) currently fetches 19.2-times earnings and boasts operating margins of 28.2%.
SEE: Analyzing Operating Margins
The Bottom Line
When markets are falling, people rush to sell. When markets are rising, people rush to buy. And everywhere in between, people are buying and selling. All of that activity translates into profits for the brokers and clearing houses, making them an interesting play in themselves.