Are you ready to start investing? Choosing a brokerage is a very important decision before investing. A lot of it depends on your investing style. Some people might be dividend investors, some growth/value investors, some just do index fund investing etc. Based on your requirements, you need to understand what all features various brokers offers and then choose a broker.
Here are some factors to consider when choosing a broker
1. Account Offerings
There are different types of investment accounts. Like retirement accounts (401K’s IRA’s), individual investment account, checking account etc. Not all brokers offer all type of accounts. There are certain types of investments you should buy inside specific tax-sheltered accounts to maximize tax free returns. Most retirement accounts also have limits on amounts you can contribute yearly. Depending on your requirements you might need all types of accounts or maybe just one. But usually for a sound retirement strategy people have both retirement and individual investing accounts.
2. Account features
Not every broker offers all type of features. Ability to reinvest dividends(DRIP) is very useful to keep your investing on auto pilot. Automated Customer Account Transfer(ACATS), helps in transfer of securities from one broker to another. Some brokers do not have the ability to transfer in. This could be much needed if another broker of yours decides to shut down abruptly. You might need ACATS-in ability in your second broker to move stocks. Real time quotes, analysis/research on stocks, ability to place different kind of orders like limit, stop etc. and schedule execution are all also very important features. Ease of moving money from and into accounts. Is the broker fast enough to move money? Since many times you will only get a buying opportunity for a day or two and you need the money then to buy stocks.
This includes fee to buy or sell an individual stock. Any fees to start the brokerage account? Annual fee on the account? (this should not even exist). Any minimum balance requirements to maintain? Some brokers have different fees to buy individual stocks and different fee for ETF’s/index funds etc. So, make sure when you make your decision you do know about the fee charges. Also, a reminder free is not always the best route to go. You might be compromising on some other features in exchange of no commissions.
4. User Interface
This includes the website ui as well as a mobile application UI. Ability to look at charts, create watch lists, create stock screens is important. Availability of educational resources which you can read through in your time. Security settings and brokers emphasis on keeping data safe. Ease of access to historic records/statements for tax purposes, to calculate or look at how you are performing is helpful to track your progress over time.
Based on above factors I like the two below:
- $4.95 to buy or sell stocks/ETF’s
- $0 – $76 for index & mutual funds only to buy no fee to sell.
- $0 annual fee on most accounts $0 – 1000$ minimum balance check more here
This broker house has been around since 1976. Their customer service is top notch. Not only can you ask questions about your account, you can even get advisors, ask about transferring your brokerage from other places etc. They are helpful on every doubt you have. Their chat support is phenomenal. I haven’t had to call in at all even once! Other features I mentioned above are also offered by Schwab. 4.95$ a trade for a full-service brokerage like Schwab in my opinion is totally worth it. Currently they also have a 100$ sign up bonus to sign up for new account. Also a fair warning, Schwab usually does a hard credit pull if you open an account with them for first time ever(without any prior relationship). But I think it’s totally worth it.
- People who do long term investing, buy only few times a year. Avoid friction of fees by buying few times a year.
- Those who want to do DRIP investing. Set your dividends to DRIP and forget about them.
- People who like to buy index funds, as Schwab has cheap expense ratio index funds.
- The checking account comes with a debit card that doesn’t have any fees when used abroad anywhere!
- Based on all factors above this is a very comprehensive broker and offers most if not all of the features discussed above.
- Although Schwab provides ACH in and out functionality and a checking account, it holds deposits into any account for 4 business days. This kind of holds your funds for some time if you want to move it to another account even within Schwab.
- No fee to buy or sell stocks/etf’s.
- They are slowly rolling out ability to trade some cryptocurrencies. I am not saying you should, but just an FYI that with this app you will be able to when you get access to that feature.
- ACH in and out is very fast. Way faster than Schwab in moving money. Once you move money into the account, any mount less than or equal to 1000$ is available immediately for investing. This is great since it gives immediate access to money to buy a stock.
- Ability to trade options.
- Paid subscription tier with more features, but wont recommend that for the average long term investor.
It’s a new no fee broker that was launched in 2013 in the US. They originally started as a mobile only application. Now however they have a website and are slowly rolling on access to it for users. They don’t provide all the features listed above. Robinhood doesn’t allow for DRIP, index funds, mutual funds, retirement accounts. Also they only have the individual trading account, so you cannot ACATS in any other type of account into Robinhood. They even have a paid subscription tier, but a long term investor doesn’t really need to mess with that at all. They are currently having a promo where in you can sign up and get a stock deposited into your account for free after you setup ACH in your account.
- People who want to save money on trading fee. Its great if you have 100$ and want to buy just 1 stock of a company. You pay nothing in commission which makes it great to buy individual stocks in less quantities.
- Great for people who are starting out and very easy to setup and start buying stocks. Their mobile app has a really good UI.
- There is a small warning about the app though. No commission fee model is great! But it encourages trading. It removes a psychological block in your mind and encourages you to be more open to sell or buy an individual stocks based on daily stock movements. Being a long-term investor, there is no point buying or selling stocks daily. A lot of my friends who started with Robinhood app, buy and sell daily because they feel there are no problems in doing so, since the fee is 0$. So, they are inadvertently day trading/short term trading. Selling as soon as it goes up a bit. Selling even if it goes into huge loses etc. Not realizing the enormous tax liabilities, they create in process. This is just a warning, you can obviously use it any which way you want. The app is solely responsible to bring trading commission fees down across all brokers after it launched. All I am saying is you need to have an approach and be disciplined when investing and must follow your approach.
- No research or not many options to read latest information/news about the stocks you follow. No educational section on the app or website. So the app is solely to buy and sell securities, you can’t use this for doing any research.
- Only has ability to buy or sell stocks, ETF’s, options and crypto. Plus, only provides a taxable individual account for investing. No DRIP functionality is also a problem for dividend investors. To me all this means this app is not that feature rich for long-term investors/dividend investors. No index funds, however again buying stocks commission free is itself a big plus.
Apart from these 2 picks, there are a few other brokers as well which I have read and researched about a lot. They come up often when I try to find good brokers. However, haven’t used them so cannot write helpful descriptions on them. However, if you would like you can also look to Vanguard (for best retirement planning/investing). Interactive Brokers (for very low commission trades). Another pro-tip is a lot of big brokers allow for fee free ACATS-IN transfer of securities(they will even reimburse fees charged by your existing broker to ACATS-in to their service). Some also give you a fixed number or duration during which you can trade for commission free. You can always ask check with your broker if they offer any commission free trades if your account balance is above certain limits.
At the end of the day it comes to your requirements, your investment style, philosophy etc. If you absolutely must go with no commissions, go with Robinhood. If you like the customer service and more options available to you, go with Schwab. You can even have both accounts. No harm in that. My aim was to just elucidate some factors on which you can base your decisions.