How to choose an online stock broker
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Here at Moneywise, we like to think we know a thing or two about stock brokers. After all, we've logged in countless hours test-driving them, and we regularly publish and update in-depth reviews with our findings. Here are the aspects we analyze when we review, rate, and choose an online stock broker.
1. Cost per trade
Cost per trade is something of the holy grail of the online brokerage universe. Since it's a number, it can be easily compared with competitors. But you have to be careful not to rely on a single cost, such as stock trade cost since brokers typically have a wide assortment of fees.
Be sure to investigate all costs. Though one broker may have the lowest commission per trade on stocks, that will do you little good if you mostly trade options or invest in mutual funds, where the commissions may not be so attractive.
For help in determining across-the-board fees at popular online brokerage firms, check out our online broker comparison list. It provides an unbiased side-by-side comparison of the most typical fees charged by the major firms.
2. Minimum initial investment required
Most brokers have a minimum initial investment requirement, which may be many thousands of dollars. If you are a new investor, with little or no investment capital, it may not matter if a broker is the best in the industry if you can't meet the required minimum account deposit.
Some brokers have no minimum requirement or require only a few hundred dollars. Some large online brokers have no required minimum initial investment, when Ally Invest is the biggest one (and the best, to our opinion).
3. Types of retirement accounts available
Most popular stock brokers offer multiple types of retirement accounts to invest in, but it's best to confirm this at the very beginning. Even if you want only a regular investment account right now, you may want to open an IRA or Roth IRA in the future. You may also decide you want to open a custodial account for one of your children or a 529 account for their college funds.
Confirming these options exist before you first sign on can save you a serious research job in the future. Also, most investors like to have all of their various accounts with a single broker, particularly if they are happy with the service.
4. Proper asset allocation guidance
Asset allocation is one of the more challenging investment functions for many people, especially for new investors. It can be complicated enough to decide on initial asset allocation, but even more, involved to maintain that allocation going forward. This will require periodic rebalancing, which is not the easiest of tasks if it must be done manually.
If this is a concern, you will need to find out if the broker offers this service and if there is an additional charge. Most robo-advisor services will handle asset allocation — and automatic rebalancing — as part of their account management fee. If you're looking for “hands-off” investing, robo advisors could be the best option for you.
5. Easy-to-use website
In my opinion, a brokerage's website is one of the most important considerations. Low commissions are great, but what if the platform is confusing to use? If it takes ten steps to execute a trade, is it worth using the broker? On the other hand, more experienced day traders prefer to use more complicated platforms akin to the Bloomberg Terminal. However, a platform with all those bells and whistles should still be useable.
6. Direct investment advice
With the trend in online investing, DIY (do it yourself) investing has become the buzz phrase. But what if you're not a DIY investor and have no interest in becoming one? This is where you'll have to determine if a broker provides any direct investment advice and if there is any charge for the service.
Some stock brokers will offer limited investment advice, while others will provide a full investment advisory service, usually for a small fee. Still, others may charge you for advice on an as-needed basis. One example of this is when you want to make a broker-assisted trade. Some firms will charge a higher transaction fee if you require broker assistance.
It's important to understand that a major reason brokers can charge low transaction fees is precise that they offer little or no human assistance. If you want that kind of advice or assistance, be sure to investigate the availability at any firms you are considering, and be aware that it is very likely to change the pricing structure.
7. Access to investment research
Access to investment research via your broker is not only convenient but also can save you money. Purchasing stock and mutual fund research can be costly. A discount broker offering research papers for free is something to consider in reducing your trading expenses.
8. What investment options are available? (i.e., stocks, bonds, mutual funds, ETFs, options, forex)
A good broker is one that offers you the ability to invest in a large number of assets:
- Stocks
- Bonds
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Real Estate investment trusts
- Options
- Futures
- Certificates of Deposit
- U.S. government Treasury securities
Even if you only want to invest in ETFs right now, you have to consider the possibility you may want to spread your investment wings in the future. For that, you will need a broker who can provide you with all of the possibilities.
Related: How to diversify your investment portfolio
9. Do they have ethical investing options?
If you're interested in ESG investing, also known as sustainable investing, you'll need to take that into account when looking for a stock broker. While you can certainly research and buy stocks that are ESG yourself, there are also places that do all the research for you. For example, Aspiration offers an ESG investing option.
10. Interest on uninvested funds
Though most brokers do offer interest on uninvested funds — usually at money market levels — not all do. That's easy to overlook when interest-bearing investments pay less than 1%, but it will become more important when interest rates rise to higher levels.
11. Third-party referrals
Before signing up with any broker, get opinions from people who either are currently invested with that firm or have been in the past. No matter how convincing a broker's ads are, there could be issues that aren't apparent to the casual observer.
At the same time, be careful about relying on information, opinions, and advice provided by investment broker comparison sites. These sites are mostly aggregators that present brokerage services on an affiliate basis, which is to say they get paid to steer customers to the brokers.
You can spot these sites easily because they provide only the most superficial information, tell you everything is great, and never report any negatives connected with the service. These are ad sites, not objective advice sources, and they're pretty easy to spot.
12. Quality (and availability) of customer support
Even DIY investors sometimes need assistance from customer support. Make sure a firm offers such support, and it's available during more than just “regular business hours” (when your job might prevent you from calling).
Also, check to see if it's available in various forms. For example, email support and live chat can be more convenient contact methods than a direct phone.
If you prefer physical locations, you should favor a broker that has a branch location in your area. E*TRADE, for example, has more than 500 branches throughout the country.
13. Your own investment personality
Are you an active trader or buy-and-hold investor? Whichever you are will affect your choice of brokers. If you are a buy-and-hold investor and mostly invest in index funds, making only a very few trades per year, fund selection may be more important to you than low transaction fees.
You may even decide to invest with a fund family, particularly if they charge no fees on their own funds. On the other hand, if you are an active trader, executing dozens of trades per year, then transaction fees will be a major consideration.
Quick summary of the best online stock brokers
Choose the stock broker that is right for you
There are many options available when it comes to investing with a stock broker. If you want to start investing with a stock broker, consider what it is you want out of the service. Which types of investments are you interested in? Are you looking for guidance or do you want to invest on your own? What type of fees do they charge? Make sure you've looked at all of your options before choosing a stock broker.
Kat Peach is a freelance contributor for Moneywise.
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