Picking your broker is not much different from picking a stock. It starts with knowing your investing style. And today you have more options than earlier generations could dream of.
Defining a Broker
There are two types of brokers: regular brokers who deal directly with their clients and broker-resellers who act as intermediaries between the client and a larger broker.
Regular brokers generally are held in higher regard than broker-resellers. That's not to say that all resellers are inherently bad, just that you need to check them out before you sign up. Regular brokers such as those who work for TD Ameritrade, Capital One Investing, and Fidelity are members of recognized organizations such as the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
Full-Service or Discount Brokers
There is a further distinction between full-service brokers and discount brokers. As the name suggests, full-service brokers routinely offer individual advice and recommendations, and these services don't come cheap. A full-service broker does much of the legwork for the investor.
Discount brokers generally leave you to make your own decisions, although many offer the option to solicit a broker for advice on a particular trade for a fee.
Some recommend a full-service broker for new investors. But frankly, it's often not feasible for a young person to go with a more expensive full-service broker.
Today's online discount brokers typically provide a vast array of tools for investors of all experience levels. You'll learn a whole lot more about investing if you do the legwork yourself.
Costs and Fees
If you're under 30, chances are you're limited by your budget. Trade execution fees are important but there are other brokerage fees to consider. Knowing the fees and other charges that might apply to you is essential to making the most of your investment dollar. Here are some costs to consider:
- Minimums: Most brokers require a minimum balance for setting up an account. Online brokers typically have the lowest minimums, ranging from $500 to $1,000.
- Margin Accounts: A new investor might not want to open a margin account right away, but it's something to think about for the future. Margin accounts usually have higher minimum balance requirements than standard brokerage accounts. You also need to check the interest rate that your broker charges when you make a trade on margin.
- Withdrawal Fees: Some brokers charge a fee to make a withdrawal, or won't permit a withdrawal if it will drop your balance below the minimum. On the other hand, some allow you to write checks against your account, although they typically require a high minimum balance. Make sure that you understand the rules involved in removing money from an account.
Some brokers have complex fee structures that make it harder to figure out what you'll be paying. This is particularly common among broker-resellers who may use some aspect of a fee structure as a selling point to entice clients.
If a broker seems to have an unusual fee structure, it's all the more important to make sure that it's legitimate, that it will suit your best interests, and that the fee structure complements your investing style.
If the rates seem too good to be true, read the fine print in the account agreement and fee summaries. Additional fees can be hidden there.
Your choice of broker should be influenced by your investment style. Are you a trader or a buy-and-hold investor?
Traders don't hold onto stocks for a long time. They're interested in quick gains greater than the market average based on short-term price volatility, and they may make many trade executions over a short time span.
If you envision yourself as a trader, you'll want to look for a broker with very low execution fees, or trading fees could take a big bite out of your returns.
A buy-and-hold investor, often called a passive investor, holds stocks for the long term. Buy-and-hold investors are content to let the value of their investments appreciate over longer periods of time.
Many investors will find that their investing style falls somewhere between the active trader and the buy-and-hold investor, in which case other factors will become important in picking the most appropriate broker.
As an alternative to a human broker or broker-reseller, it's worth investigating the pros and cons of using a robo-advisor.
The Bottom Line
There are a number of factors to consider when picking your first broker. With Investopedia's online broker reviews we've created the most comprehensive toolset to help traders of all styles make informed, efficient, and intelligent decisions on the right online broker.
Your first broker won't necessarily be your broker for life. Your life will change, and your needs as an investor may change along with it. But you have a much better chance of making money as an investor if you put in the time it takes to choose the right broker to start with.