Finding an online discount stock broker can be a confusing and complex decision. To a novice, each broker can appear to be the same. In reality, differences can be nuanced, but can significantly affect your decision. So how does one choose a stock broker?
To narrow your decision, it comes down to asking yourself these questions:
- Does the broker’s ideals match my investment strategy?
- What are the broker’s trading fees?
- Does the brokerage offer banking services?
- Do they offer investment advisory services?
- Does the broker offer any research tools?
- What can I invest in with this broker?
- What type of customer services options do they have?
1. Does the broker match my investment strategy?
If I were a technical trader (I’m not), does the broker I want to use offer graphing tools? Same goes for someone who’s a buy-n-hold investor. It makes no sense, for example, to choose a broker whose focus is with options trading. Once you know this, it narrows your decision quite a bit.
2. What are the broker’s trading fees?
Out of all of the questions to ask, perhaps this one is most important. You can’t control the returns from your investment, or tax rates, but you can control trading fees. This is often overlooked by many beginning investors. Like a snowball rolling downhill, it can get big very fast over long periods of time.
With the advent of ETFs many brokers allow you trade a select set for free. So keep all this in mind when choosing an online broker. Fortunately in the past 20 years the price per trade has gone down significantly. There was a time when trades cost $100 or more, but today you can get trades below $4, and with various other options for free!
3. Does the brokerage offer banking services?
Most brokers just focus on trading — which is fine for most individuals — but some individuals want a one-stop brokerage that also offers banking services as well. Brokerages like: Fidelity and TD Ameritrade are good examples of this. They offer cash management services so you can write checks and pay bills on top of the investing services. In many cases the fees are non-existent or much lower than with a traditional bank.
4. Do they offer investment advisory services?
Some individuals prefer to go it alone when investing, though many want the advice of a financial advisor — or at least the option for a financial advisor to review your investment planning. TD Ameritrade is an example of one such broker. If this is the case, does the broker you’re looking to use offer investment advisors? If not, it is possible to find an independent fee-only investment advisor external to your broker.
5. Does the broker offer any research tools?
For the DIY investor, does the broker offer any research tools to help analyze and pick stocks? Do they link up to services like Morningstar for mutual fund recommendations? Capital One Investing is one such broker with a set of decent research tools.
If you’re a technical trader, you want to find out if they have graphing tools you need? For some of the lower cost brokers, they fall a little short on this end. But for most, this is fine because many third-party commercial and free services are more powerful than what’s available within your broker.
6. What can I invest in with this broker?
If you wish to trade options, going to Vanguard isn’t really a good fit. Pretty much all brokerages can trade stocks, bonds, mutual funds, and ETFs. Although, when you get into the advanced investing such as options, futures, and forex that typically is a much smaller list of brokerages.
7. What type of customer services options do they have?
How well regarded is the broker’s customer service? In my experience many of them offer great service, but are limited in hours. Customer service is a costly operational expense, and since the pricing of trades have decreased so much, customer service might be limited in hours available, increased wait times during peak hours, or offer unhelpful service. In most cases if you are looking to perform a trade via phone, expect a much higher trading fee than if you did via the web. Some brokers have introduced live chat via their web site. This can be a useful feature while using their web site.
With the advent of mobile devices, many individuals like the ability to trade on the go. If this is the case for you, factor it into your decision making process and ensure there’s a mobile app available for your tablet or phone.
Can’t Find One You Like? Use Multiple!
Can’t find one you like? There’s nothing stopping you from using multiple brokers. If you really don’t find one brokerage for all of your investment needs, it’s possible to have your investments in more than one brokerage.
In fact, once you get above a million dollars of invest-able assets, I recommend going with more than one brokerage. With the advent of online aggregators like Personal Capital and Mint.com, and desktop applications like Quicken it’s a trivial exercise to manage multiple accounts at different brokers. All support seeing a holistic view of all of your investments for asset allocation and monitoring performance.
What to Look For in an Online Broker
Some of these features might be more important to you than others. I for example don’t care about if there’s a branch office near my house, or if the brokerage offers research tools. You on the other hand, depending upon your investment style, might think these are important features. So factor all of these questions into consideration.
Fortunately, the stock broker industry is very mature, and there are very few new entries into the sector. So the services added each year have been more evolutionary than revolutionary.
Almost all have a long business history, and aren’t a fly-by-night operations. Most brokers out there are at least 10 years old, and/or have been merged with other brokers. Some have been around for over 20 years, and pre-date the Internet back when you wanted to make a trade, you had to use proprietary software via a dialup modem.
Finding a broker can be a complex process. Though if you know what services are important to you, it can help narrow your search. It’s important to consider your investment style, and cost to trade. Though those aren’t the only factors.
Since most have zero dollar requirement when opening an account, it’s easy to open an account with multiple brokers. If you are transferring from existing broker or depositing new money, you should always check out our stock broker promotion list. This resouce alone shouldn’t be the reason to pick a broker, but it certainly helps in getting a benefit when signing up.