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How to Choose the Best Online Brokerage

best online brokerage

Many of my regular readers know that I spent a number of years in the online brokerage industry. Because of that I often get asked what the best online brokerage is so I thought it would be a good idea to write a simple blog post about it. :-)

If you do a simple online search for the best online broker you’ll come out with roughly 65 million results. Wow! There aren’t quite that many online brokers, but there are easily dozens if not hundreds. That can make it difficult to determine which is the best online brokerage for you as many of the results are simply brokerages trying to sell to you. The result is a list of brokerage options deep enough to need hip waders for and can be overwhelming, especially if you’re a novice when it comes to investing in the stock market.

Before I get on with what the best online broker is for you, I’ll add that it’s going to be different for each of us and that it’s important to find a company that meets your needs. Additionally, you’ll want to make sure they’re upfront about having an association with FINRA, which is the largest independent securities regulator in the U.S. as well as offering SIPC coverage, which is insurance to protect you as the investor in the event the brokerage goes out of business.

Price Doesn’t Determine the Best Online Brokerage

Cheap does not necessarily mean good when it comes to choosing the best online brokerage. I know, I said it….but you largely get what you pay for when it comes to online stock trading. The point being that you can find a broker that will place trades for you for $2 or less but they offer you nothing else. If all you want is a portal to place stock trades then maybe the $2 per trade option is the best online brokerage for you, but if you need more then you’ll likely be disappointed over time.

That said, you also do not want to pay more than you have to. Most of the larger online brokerages pay only $2 or $3 per trade they place for you. If you’re paying over $10, then you do the math. That can add up if you’re an active trader. I personally invest through OptionsHouse and Scottrade. My commission through them, respectively, is a flat $3.95 and $7 per stock trade. I get different tools from the both of them and am willing to pay more for that.

Beyond price, you also want to watch out for brokerage firms that nickel and dime you every chance they get. I have no problem paying for a service I need, but there comes a point in time when it goes overboard. The other thing to watch out for is many brokerages will do nothing but sell to you whenever you call in. Some might be ok with that, but for many it will feel exactly how it comes across – they only want more of your money and could care less about your needs.

Look Beyond Stocks

If you’re trading stocks online, you might think that the only thing an online brokerage needs to offer is stock trading. Even if that is the case for you now, it likely won’t be the only thing you want or need in the future. The best online brokers will offer a variety of investment options, such as:

  • Access to a wide array of mutual funds
  • CDs, or other banking products for short term investment needs
  • Access to a variety of bonds, both state and federal as well as international if you like

You might not think of an online brokerage offering things like CDs and international bonds, but the larger ones such as Etrade  and OptionsXpress do as it helps them serve a wider range of clients. You may not have need for them now, but if you do in the near future then one that does many be the best online brokerage for you.

Ease of Use

Many online brokers will tout that their platform is easy to use and that might be the case for some. However, if you’re not an active trader, a brokerage like TradeStation will be overwhelming to you and you will want something tamer like Scottrade or Motif Investing.

A number of online brokerages will allow you to open either paper trading accounts or accounts with a zero balance. One thing I’ve seen a number of investors do is open a few of those and play with each to see which one fits them best. Other things to consider beyond ease of use of their site are:

  • Do they have a mobile app you can use when you’re on the go?
  • Does their site regularly have down times where you can’t place trades?
  • Does the site make you jump through hoops in order to get logged in?

The best online brokerages are going to make it as easy as possible for you to use their site and if not, at least they’ll provide courses or assistance to help get you started.

What Extras Do They Offer?

With the growing competition in the online brokerage space, many firms are adding more and more tools to attract and keep clients. If you’re looking for the best online brokerage for you, you should consider what you want beyond a simple platform that will allow you to do your online stock trading.

There is a wide variety of possible extras that online brokers will offer, from free online courses on specifics related to investing in the stock market to live seminars in different areas of the country. The beauty is that many brokers will offer these services for free. The best online brokerages are ones that offer courses that range from novice to advanced investors and allow you to do them at your own pace as they realize a more informed investor is going to be generally happier and thus perform better with their investing.

Customer Service

I left this part last on purpose. Having been on both sides of the situation I can say the best online brokerage for you is going to be one that offers stellar customer service. Let’s face it; the firm is handling your investments. That is your hard earned money that you have plans for, whether it’s to save for retirement, save for your children to go to college, or save for a down payment on your next home, that is your money and you want to deal with a brokerage that understands that and acts accordingly.

Good customer service, in regards to an online brokerage, comes in many forms. The most important to me is, are they going to help me when I contact them for help? That could mean a variety of things but one I commonly dealt with was helping walk individuals through placing an online stock trade using our platform. They should be willing to do that for you without charge and with patience. Essentially, they need to extend courtesy.

Other than that, how can you contact them? I believe the best online brokerages are the ones that offer a variety of ways to reach them: phone, email and chat. You never know how you’ll need to contact them and you want options. You also never want to have to wait around for 20 minutes on hold or sit in a queue to reach someone as time is money when it comes to investing in the stock market. The best online brokerage for you is going to understand that clients have needs and those needs should come first. Before deciding on online brokerage make sure you feel ok doing business with them and often times that comes down to their level of service.

Deciding on the best online brokerage for you can be difficult. While many might say they’re the best online brokerage that isn’t always the case, especially if they don’t offer the services you need. If you’re in the hunt for a new place to do your investing, you can also check out my Compare the Best Online Brokerages Page to help you narrow down your choice to some of the better options available.

 

Where do you do your investing? What things are you looking for when deciding on an online brokerage?

 

 

Photo courtesy of: Marcy Hargan

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally

6 Comments

  • Poor Student says:

    Great information. I’ve been shopping for online brokerage to find the best fit, so this article is quite helpful. Thanks for sharing!
    Poor Student recently posted…Should You Keep Your Student Health Benefits or Opt Out?My Profile

  • DivHut says:

    Good tips, though these days pretty much any online broker will suffice for most investor needs. I have been with Scottrade and recently Sharebuilder and find their prices and ease of use to be right at my sweet spot. In the “old” days broker fees were outrageous, now every online broker offers trades from $0 (loyal3) to under $10. Thanks for sharing.
    DivHut recently posted…Investing Ideas From My BathroomMy Profile

    • John says:

      Thanks DivHut. However, I’d have to respectfully disagree. Having spoken to investors on a daily basis for a number of years, there are a good number of things most do not look out for when they choose a brokerage. They assume all are the same and when they don’t read the fine print it gets them in trouble. Commissions have come down some, though there are still a number out there that charge $10 per trade. Etrade and TD Ameritrade come to mind first. With what brokerages pay for the trades, there is no need to pay that much to place a trade. I’d much rather see that money in their pocket as opposed to the brokerage.

  • DivHut says:

    Hi John,

    Well even $10 a trade is very cheap by today’s standards compared to commissions from yesteryear. I actually found an old stock trade of mine (in paper form) and you can see what I used to pay as a commission and this was a discount brokerage firm. Commish used to be 200 – 300 per trade for full service brokerages. http://divhut.com/2014/05/first-stock-dividend/ Click on the image. I understand what you are saying and these days people have a choice of $0 trades too with Loyal3. Thanks for the reply!
    DivHut recently posted…Investing Ideas From My BathroomMy Profile

    • John says:

      Fair point about it being cheaper than it was in years past. That has helped the average retail investor a lot in terms of pricing. That said, unfortunately there are still brokers and brokerages that do still charge hefty amounts to place trades. Thankfully they’re on the fringes, but investors are still paying them. The problem I saw in speaking with investors was that many are already coming in not informed about how to invest and they just picked whatever brokerage they could find even though it wasn’t the best fit for them and their given situations. Thus why it’s good to have these discussions so people can see that they have options out there and to find what works best for them. :)

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