One of the most important investment decisions you'll make has nothing to do with stocks, bonds or mutual funds. This crucial decision is picking a broker. There are dozens of companies offering brokerage services on the internet, and many of them are just as good or better than traditional, brick-and-mortar businesses, but how to decide which one is best for you? (To learn more, check out Picking Your First Broker.)
Here are 10 critical factors you'll want to consider:
- Discount is not always a good deal. Consider starting out with a full-service broker. They are often best for novice investors who may still need to build confidence and knowledge of the markets. As you become a more sophisticated investor, you can graduate into investing more of your money yourself. (For more insight, see Full-Service Broker Or DIY?)
- Availability is key. Try hitting the company's website at different times throughout the day, especially during peak trading hours. Watch how fast their site loads and check some of the links to ensure there are no technical difficulties.
- Alternative trading provides flexibility. Although we all love the net, we can't always be at our computers. Check to see what other options the firm offers for placing trades. Other alternatives may include touch-tone telephone trades, fax ordering, or doing it the low-tech way - talking to a broker over the phone. Word to the wise: make sure you take note of the prices for these alternatives; they will often differ from an online trade.
- The broker's background matters. What are others saying about the brokerage? Just as you should do your research before buying a stock, you should find out as much as possible about your broker.
- Price isn't everything. Remember the saying "you get what you pay for"? As with anything you buy, the price may be indicative of the quality. Don't open an account with a broker simply because it offers the lowest commission cost. Advertised rates for companies vary between zero and $40 per trade, with the average around $20. There may be fine print in the ad specifying which services the advertised rate will actually entitle you to. In most cases, there will be higher fees for limit orders, options and those trades over the phone with your broker. You might find that the advertised commission rate may not apply to the type of trade you want to execute. (For more insight, read What You Get When You Pay For Investment Services.)
- Minimum deposits may not be minimal. See how much of an initial deposit the firm requires for opening an account. Beware of high minimum balances: some companies require as much as $10,000 to start. This might be fine for some investors, but not others.
- Product selection is important. When choosing a brokerage, most people are probably thinking primarily about buying stocks. Remember there are also many investment alternatives that aren't necessarily offered by every company. This includes CDs, municipal bonds, futures, options and even gold/silver certificates. Many brokerages also offer other financial services, such as checking accounts and credit cards.
- Customer service counts. There is nothing more exasperating than sitting on hold for 20 minutes waiting to get help. Before you open an account, call the company's help desk with a fake question to test how long it takes to get a response.
- Return on cash is money in the bank. You are likely to always have some cash in your brokerage account. Some brokerages will offer 3-5% interest on this money, while others won't offer you a dime. Phone or email the brokerage to find out what it offers. In fact, this is a good question to ask while you're testing its customer service!
- Extras can make a difference. Be on the lookout for extra goodies offered by brokerages to people thinking of opening an account. Don't base your decision entirely on the $100 in free trades, but do keep this in mind.
The Bottom Line
With a click of the mouse, from just about anywhere in the world, you can buy and sell stocks using an online broker. The right tools for the trade are key to every successful venture; finding success in the market begins with choosing the right broker.