10 Tips For Choosing An Online Broker
Unless you have a terminal patched straight into an exchange, you're going to need a broker to help you buy and sell stocks. The days of having to be the monocle-wearing, top-hat type of investor to get the attention of a broker are over since May Day marked the birth of the discount brokerage. With investing open to an increasing number of people, there are an ever-growing number of broker options to choose from. On top of May Day, the growth of the internet has made investing online cheaper, safer and easier than ever before, but finding the perfect online broker among all the solicitors can be daunting if you don't know what you're looking for. Here are our 10 tips for choosing an online broker.
If You Could Be An Animal
What kind of animal would you be? A bull? A bear? A bullish bear? Before you start your search, you need to give yourself the equivalent of an investor's personality quiz.
Are you looking to buy-and-hold stock? Do you want to day trade? Are you a passive investor, a value investor, or a flipper? Your answers to these questions will depend on what you want to get out of investing, as well as how risk-averse you are. If the thought of trading stocks makes you break out in a cold sweat, then you can buy bonds without worrying about brokers. If you're a trader at heart, however, you're going to need an account that offers good rates on a large volume of trades.
For more information on trading, see Day Trading Strategies For Beginners.
Discount Isn't Always A Great Deal
There are different levels of support available to investors through brokerages. If you feel confident in doing your own research and making buy-and-sell decisions independently, then a discount brokerage is the best option.
If, however, you're just starting out and need a helping hand while you learn the ins and outs of the market, a full-service broker might be a better fit. And, you can always move to a discount brokerage as you become more confident in your investing abilities. For more on this, see Brokers and Online Trading: Full Service or Discount?
Keep Up On The Gossip
A lot of people are trading online, and that means a lot of opinions on which online brokers are best. There are pages and pages of postings that list individual investor's experience, both good and bad, with specific online brokers. As with any message-board, there are no restrictions to posting, so take the information with a grain of salt. The big online brokers will be easy to research in-depth, and you may even find some dark horses now where credit unions and other institutions are running online investment services.
To find out where to look, go to the main article 10 Tips For Choosing An Online Broker.
Even if you aren't planning on momentum plays, where every second counts, the broker website's speed is important. To gauge the speed, visit the website at different times throughout the day, especially peak trading hours, and see how fast it loads and transfers between links. If there is significant lag or other technical issues, you'll have to factor that in.
For traders, a slow website can mean losses when a split-second decision is processed too late. For passive and long-term investors, the website speed might not be a big sticking point. To keep reading about trading, see Day Trading: An Introduction.
Stone Age Trades
With the wireless networks growing ever wider it's hard to imagine living without internet access, but it's a possibility you'll want to consider.
When you're away from your computer, what old-fashioned options does your potential broker offer for accessing your portfolio? These may include touch-tone trading, faxes, or directly speaking to a broker. Although you may not rely on these alternatives often, it is worth noting how much these will cost you in fees. If you're network goes down, it may be better to let your positions sit than to incur extra fees for immediate trades.
To learn more about online brokers and fees, see 10 Things To Consider Before Selecting An Online Broker.
You Get What You Pay For
Price is going to be one of the main criteria for sifting through online brokers. The commission rates for online brokers average around $20, but run the gamut of $0 to over $40. In most cases, the price indicates the quality of service you'll get, or rather what services you get.
If you're set on going with the cheapest option, carefully check the fine print to see whether or not it is really the cheapest. You might find that the advertised rate only covers plain vanilla trades and that there are extra fees for options, limit orders, stop-loss and so on. Instead, make sure to look for the cheapest broker providing the services you want. See The Hidden Costs of Investing for more.
The minimum deposit amount comes right after price-per-trade on the scale of importance. This is basically how much you have to put down to start trading. This can be anywhere from hundreds to thousands of dollars. You might also be required to put down more if you want to engage in certain types of trading, like shorting or margin trading. Although you probably won't be shorting right out of the gate, the added requirements may be a sticking point if you see yourself shorting in the future. For tips on investing with smaller sums, see Start Investing With Only $1,000.
While some investors are more than happy to buy, sell, covet and dream of stocks day in and day out, others like a little more variety in their financial diet. Diversification between investments, i.e. holding some fixed-income instruments in addition to stocks, is a worthy strategy. Although you can get some fixed-income exposure through your bank, you will want to check if your online broker offers CDs, municipal bonds, and more complex instruments like options and futures. One of the problems with opening an online brokerage account with your bank is that it may limit what you can invest in according to its own metrics, not yours. For more on diversification, see Introduction To Diversification.
The Last Human On Earth
Customer service has become automated to a frustrating degree in all industries, but this can be especially true with online brokerages. Pressing button after button and getting deeper and deeper into the maze of recorded messages can leave you feeling like robots really have taken over. You'll need customer service someday, so it's a good ideal to give a potential online broker a test run. Call the help desk, send an email to the help center and check what other option they offer. Bear in mind that discount brokers offer less customer service to reduce overhead costs and keep service fees low. You may have to balance your frustrations with your savings.
Interest On Idle Funds
Any portfolio is bound to have some idle cash sitting around, so it's important to find out what kind of return the online broker offers on idle cash. Typically, the return should be in line with those of a money market fund, but they may go as high as 5%. If an online broker offers no return on cash held in the portfolio, you'll want to know the reason why. They may be doing an old bankers trick where they keep the interest on your cash for themselves. For more on money market funds see, Money Market vs. Savings Accounts.
Being Soured By Sweeteners
Many online brokers offer sweeteners to tempt you to sign up. This can be a $100 in free trades, or waived fees for a certain time period, and so on. You shouldn't base your decision completely on this, just as you shouldn't buy a car from a dealership just because they advertise "cash back", but the sweeteners could break a stalemate between two otherwise equal brokers. Also, you might look at the non-investment-related extras. Some online brokers have expanded to offer traditional banking services like checking accounts, credit cards, or the may allow you to write checks directly from your account. Beware, some may charge fees for withdrawing your money so make sure these sweeteners don't sour your savings.
See Don't Let Brokerage Fees Undermine Your Returns for more.
Your Mouse And The Elephants
Once you've chosen your online broker, you're ready to enter the world of bulls, bears, elephants and vultures. Although it sounds like a zoo out there, many people, investing great Peter Lynch among them, believe that the individual investor has the edge on the Wall Street elites. So take up your mouse, go find a tenbagger, or take up a stake in the next category killer and show those other animals what's what. The world investing is at your fingertips.