If you want to trade stocks or other investments, your cheapest and easiest way is often through an online broker. It’s a company that acts as an intermediary between you and the financial markets, and many offer research, educational tools and insights to help you make smart investing decisions.
In this guide, we’ll walk you through what an online broker is and what to look for when choosing the best fit for your investing needs.
Understanding Online Brokers
An online broker facilitates transactions of a security like a stock or a fund over an electronic network, and these transactions are carried out through its trading platform. Online brokers rose in popularity in the mid-to-late 1990s, driven by the development of high-performance computers and faster internet connectivity. Now they’re the most ubiquitous option for retail investors.
Online Broker Fees
Online brokers charge customers for the services they provide, and that can add up if you’re not watching. Here are some of the fees you may run across:
- Trading fees: These are charged on the trades you make and are typically a percentage of the transaction value.
- Fee for broker-assisted trade: If you need assistance in the form of advice, the fee could be substantially higher than the regular trading fee for self-directed trades.
- Account maintenance or inactivity fees: An annual fee charged for maintenance of your account and often charged when your account balance falls below a minimum.
- Margin: Sometimes the broker lends money to clients in exchange for interest.
- Withdrawal fees: Levied by a few brokers when you withdraw cash from your account.
Advantages of Using an Online Broker
Online trading offers convenience, allowing you to monitor quotes in real time, place orders and manage your portfolio from anywhere, whether it’s from your home computer or your phone. It enables faster execution of trades, helping you respond quickly to market movement. Additionally, it is more cost-effective than using a traditional brokerage.
Risks Associated with Online Brokers
The speed and convenience of online trading can become a double-edged sword, because it can lead overenthusiastic traders to make costly mistakes. You can mitigate this risk by setting up safeguards, such as limit orders.
A lack of personalized guidance could spell trouble for some traders, especially when building a portfolio or rebalancing. If you’re out of your depth, talk to a professional.
Security risks, while rare, are also a concern, as online transactions expose you to account hacking risks. Technical glitches, which can happen from time to time, could also result in overpaying or clocking in excess losses.
Types of Online Brokers
Full-Service Brokers
Full-service brokers serve as a one-stop shop for a wide variety of investment-related services, including trading, advice, research, retirement planning, education and tax tips. Because of their ample offerings and greater attention to custom service, their fees can be higher when compared to a discount broker. Charles Schwab, Fidelity Investments and the Vanguard Group are some of the biggest full-service brokers available to investors.
Discount Brokers
Discount brokers execute trades on behalf of a client at a discounted fee. They charge little or no commission, and their service is limited to assisting in the trade. Suitable for investors who prefer managing their portfolio, they offer less or no investment advice, research, tax planning or retirement advice. Robinhood, E*TRADE and Interactive Brokers are some of the more popular options, but it should be noted that many full-service brokers offer competitive trading commissions as well.
Robo-Advisors
Robo-advisors are automated online platforms that offer algorithm-driven trading, with very little human element involved. They operate by gathering basic information from their clients, including their current financial situation, investment goals and risk appetite, and they then use the information for advisory services or to automatically invest client assets. Robo-advisors do not offer personalized services. Sofi, Playbook and Wealthfront among your choices to consider.
How to Open an Online Broker Account
To begin trading, you’ll need to open an account. Start by filling out an account’s application form and provide documents for identity verification. Requirements may vary, but most brokers will require you to submit the following:
- Personal information such as name, address, and employment details
- Social security number
- Signature card
- W-9 form
- Two documents for proof of identity, including one photo ID
Next, choose the method to fund the account: electronic fund transfer, wire transfer, checks, or stock certificates. After funding the account, you’re ready to place a trade.
Check our picks for the best online brokers for beginners.
What to Consider When Choosing an Online Broker
Broker Registration
Choosing a broker registered with the Securities Investor Protection Corporation (SIPC) protects investors in the event of a brokerage failure up to $500,000, which includes a $250,000 limit for cash.
Minimum Balance Requirement
Many brokers don’t require a minimum balance to open an account, and you can start trading with as little as $1. Some brokers do have minimums, however, so make sure you understand their terms.
Investing Goals
Investment objectives of an investor may range from safety to income growth to retirement savings to tax minimization. Choose an online broker that aligns with your goals.
Trading Frequency
If you don’t plan to trade frequently, choose a broker that doesn’t charge inactivity fees.
Guidance
If you’re a beginner, you might trade infrequently but need good educational resources to walk you through the maze of investing. A full-service broker may come in handy in such an instance. However, seasoned traders who are active investors could do just as well with a discount broker.
Execution Speed
Given the volatility and rapidity associated with stock moves, a platform that allows timely execution of trades is essential for making profits. It pays well to check how fast a particular broker’s website launches, even during peak hours.
Commissions and Fees
Analyze the commission structure and fees to cut down on your trading costs. Some brokers charge a low commission and advertise themselves to be the cheapest option available, but they load charges onto other fees. A careful analysis of commissions as well as other fees is a must.
Customer Service
Discount brokers, in the name of cutting overheads, may not offer robust customer service. Look out for brokers that offer customer service around the clock. Analyze the various forms of support available, such as live chat, telephone support, email, etc.
Range of Asset Classes
An online broker offering a wide range of asset classes, including stocks, bonds, certificates of deposit (CDs), cryptocurrencies, commodities, options, futures, exchange-traded funds (ETFs), mutual funds, and foreign exchange is a better bet. Combining different asset classes will come in handy to build a diversified portfolio and mitigate risk.
Open a Brokerage Account and Start Investing Today
Opening an online brokerage account is a great first step to start your investment journey. Whether you’re investing for retirement or looking to get into advanced markets like forex or derviatives, there is an online brokerage account for you.
Questions and Answers
Frequently Asked Questions
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You must consider the fees, customer service, execution speed, trading tools, support, and account minimums.
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Online brokers have fees for margin accounts, broker-assisted trades, account inactivity, and withdrawals.
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An online broker is a financial intermediary, allowing individuals to buy and sell various financial instruments, such as stocks, bonds, options, and mutual funds, through an online platform. They also provide access to trading platforms, research tools, and market data.
