Why Do I Need A Broker?You just read an interesting article about a company that is revolutionizing their industry, and you want to jump in to buy some stock while it's still cheap. Now the question is what do you need to do to do so. Well, first of all, you need to choose a broker. Why so? Well, a broker is an individual or company that has the ability to execute stock trades on your behalf.
Full Service vs. Discount BrokersFiguring out which broker is right for your needs can be a bit tricky, as there are multiple types of brokers with different tools, resources, and services. For example, there are full-service brokers and discount brokers. With full-service brokers, you will receive an individual broker that will work one on one with you and will give you investment ideas, reports on your portfolio and be personally available to you. Essentially, he will help you throughout the process. Sounds great, right? The obvious caveat here is that these services are not free and will be paid for via much higher fees and commissions. On the other hand, if you're more independent and want to do it yourself, then a discount broker may be right for you. Some notable full-service brokers: Edward Jones, UBS, Raymond James, Merrill Lynch, Wells Fargo Advisors, Morgan Stanley Smith Barney
As for discount brokers, some popular names are: E-Trade, TD Ameritrade, Charles Schwab, Scottrade, Fidelity Investments, Merrill Edge, Capital One Sharebuilder, and SprinkleBit.
Some people recommend that beginner investors start off with full-service brokers to get the hang of the markets, but as I said, the cost associated with these full-service brokers can be prohibitive, especially considering discount brokers now offer plenty of tools and education for the beginner to start navigating the markets on their own.
What To Look For?In the end, you get what you pay for, so while commissions and fees are an important factor, there are several other elements that should factor into your decision like account minimums, investment products, trading tools, available research and education, mobile platforms and customer service. A lot of this depends on your: Investment experience = the less you have, the more you'll need by way of trading tools, research and education, and customer service.
Trading frequency = the more you trade, the more commissions factor into your decision because they'll end up eating into your returns, but at the same time, the more you trade, the more tools and investment products you'll need to ensure your trading the right stocks at the right time.
Investable capital = the more you have to invest, the less important commissions and fees are, but the more service you should expect to protect your money. Here are some things to consider when you choose a broker:
Commissions and FeesAre you more of a "trader", who executes many transactions based on short term price movements? Or, are you more of a buy and hold investor, holding stocks for a long period of time and watching them appreciate? Or maybe you are a new investor who knows nothing about the markets and wants to learn?
If you're a "trader", who executes many transactions based on short term price movements, or someone that has a lower amount invested in each stock you own, then you may want to aim for a broker that charges lower commissions because those charges will end up making up a larger percentage of your overall investments over time. That said, you should consider firms like TradeKing ($4.95 per trade) or even SprinkleBit's Premium account that equates to $5 per trade.
If you're a buy and hold investor or someone that maintains larger positions in a company, transaction fees become less important, so paying $9.99 per trade (as is the case on E-Trade) won't hurt your overall return as much. However, it is important to read the fine print because in addition to the commission, some brokers also charge other transaction fees with each trade, along with monthly inactivity fees, paper statement fees, etc.
Account MinimumsThese range anywhere between $0 (Sharebuilder or TD Ameritrade) to $ 2,000 (E-Trade). As such, this criteria may very well define which broker you choose, depending on how much capital you wish to start with. At the same time, if you really want to begin building a proper portfolio of securities, then these numbers become somewhat insignificant as you should have at least $2,000 to really make it worthwhile when keeping commissions in mind.
Investment ProductsPlanning on buying more than just stocks? Don't have a lot of money to invest right now or looking to be a passive investor that wants a fully diversified portfolio? Looking to generate income from your investments? Hoping to hedge other investments using options or futures? Want to invest in the international markets? If any of these are applicable to you, then it's important to research whether or not the broker you're looking at offers a full range of product offerings.
For example, if you don't have a lot of money to invest, then buying stocks may not be the best way for you to reach your goals, especially if you are risk averse by nature. Instead, you might want to explore ETFs or mutual funds which give you a diverse portfolio of securities at a lower cost than buying those stocks individually on your own, but still allow you to spread the risk around. Many brokers offer a number of low fee or no fee (no load) mutual funds and ETFs, so that you don't even have to worry about commission costs. You can also set up auto-investing programs that let you directly deposit money into your account on a monthly basis, making it easy to keep saving towards your goals.
For those looking for income generation (think bonds) or the ability to hedge your risk in other investments (think options / futures), then you may want to look for a broker that offers those securities in addition to the usual stock offerings. Meanwhile, if you're hoping to invest in companies domiciled overseas, then you should make sure that your broker allows you to trade stocks on an exchange in the country of interest. While you may have to open a separate account for overseas trading, it's still nice to be able to manage all your investing under one roof.
Research and EducationWhen you're a do it yourself (DIY) investor, broker provided research and education can be critical in helping you choose your investments, as you don't have an individual broker to hold your hand through the process. The quality and quantity of research and education available through discount brokerages can vary greatly however.
If nothing else, most firms incorporate street research offerings into the platform (e.g. stock ratings from Wall Street Firms like JP Morgan, Credit Suisse, Standard & Poor's, Moody's, Zack's, etc.). Other more established discount brokerage firms also offer proprietary ratings that are driven by their own analysts, like Charles Schwab's Equity Ratings®, Mutual Fund or ETF Select List®.
On top of what is offered with your broker, many sites such as Seeking Alpha and Stock Twits exist with regular contributions from qualified investors that can help inspire your next trade. In addition to research, many firms also offer a variety of investor education offerings that will help you get a handle of the markets and start building a proper strategy. These can vary from topical articles to video tutorials and podcasts to live seminars and interactive demos. The sophistication of the topics tends to run the spectrum of getting started with investing on the one hand to advanced options trading strategies on the other.
Firm's like SprinkleBit have taken it a step further by making trading social. They not only have an interactive investment education curriculum with crowdsourced teaching assistants via SprinkleBit University, but they also have an engaging community and virtual trading platform that lets you practice trading risk-free, while watching other traders in action and asking questions along the way. If you aren't satisfied with your broker's education, sites like Investopedia offer a very complete investor education platform that can complement a broker's existing offerings.
Trading ToolsIf you're like me, then you probably don't have the time and patience to read all the research out there before taking action. That's where a broker's trading tools can come into play in helping you choose investments that are right for you. Whether you're a more advanced trader that wants the ability to back-test your strategies or a beginner that just wants to narrow your choices using a few filtering criteria, it pays to do a little research on what brokers offer what.
In addition to basic stock screeners and comparison tools, most brokers offer some form of advanced trading tools specifically for active traders, but most of those features won't matter or aren't even available to a typical investor.
As one would expect, most stock trading will likely occur on mobile devices in the near future. In light of this fact, it's essential that your future broker has a well made iPhone or Android application which allows you to access most of your firms trading features directly from your smart-phone. Most brokers have caught onto this but some have yet to release a mobile app that allows for much more than just viewing your portfolio. Keep an eye out for SprinkleBit's ground-breaking mobile app coming later this year!
Customer ServiceWhile discount brokers may not give you direct advice on what to buy and sell (unless they also offer an advisory arm), they do offer a variety of help and support to ensure you're not out there on your own. The level of that support also can vary. While some, like Charles Schwab and TD Ameritrade, offer 24/7 phone and live chat support from friendly representatives with limited wait times, others aren't so helpful with reps from foreign call centers, limited hours, and longer hold times. Also, firms like Scottrade offer convenient branch locations (500+) across the US, so you can actually go in and talk to someone face to face instead of feeling all alone on the internet. As I alluded to earlier, many of these branch offices include advisors and brokers that can also help manage your portfolio if you have enough money invested with them. A little personal touch goes a long way.
Clearly, discount brokers can vary greatly in the services they offer and subsequently, the fees they charge. Take a look at how these firms stack up:
Updated as of September 15, 2014.
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