Are you ready to start investing? Choosing an online broker 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 offer and then go about choosing an online broker for yourself.
Factors to consider when choosing an online 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 types 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. More on this later.
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.
5. Research Reports
Many online brokers offer free access to research reports from popular analysts. It allows you to view their detailed commentary on a stock you are researching. Their star ratings, information on moats, historical data, ratios etc. This information can definitely help you in your research before buying a stock. So do make sure this is also a factor when you are choosing an online broker.
Based on above factors, best online brokers are:
- Now commission FREE (0$ to buy/sell stocks and ETF’s) starting 7th October 2019
- $0 – $76 for index & mutual funds only to buy, no fee to sell (this only applies to non-Schwab funds, which makes sense since they want to encourage you to buy more of Schwab owned funds).
- For non-Schwab ETF’s fees may be $0-$20 depending on the ETF, but the most popular ones you want to buy are free!
- Schwab ETF’s & index funds both cost 0$ to buy or sell.
- $0 annual fee on most individual accounts, $0 – 1000$ minimum balance, check more here. I would suggest the standard Schwab one account for individual account and their standard IRA accounts which come with 0$ minimums.
- Free access to research reports from Morningstar, CFRA, Credit Suisse, Argus & Reuters.
- Their checking account ATM card doesn’t charge you any fee to use at ATM’s around the world!
This brokerage has been around since 1975. Their customer service is top notch. Not only can you ask questions about your account, you can even get advisors to talk to, 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. Before 1975, trading fees were fixed regardless of the size of your trade. The government abolished this practice in May 1975. Schwab was the pioneer to introduce discounted trades at that time. The company has a history of making decisions and introducing changes in favor of the individual investor. Schwab was one of the best online brokers in 1990’s and continues to be today. 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 / account). But I think it’s totally worth it.
- People who want a person on other end to ask any questions. Really good customer service.
- 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!
- People who like to visit a physical branch once every while. Schwab has a big network of physical locations where you can walk in and chat with advisors, make deposits have some snacks, all on the house.
- Although Schwab provides ACH in and out functionality and a checking account, it holds deposits into any account for 2-4 business days. This kind of holds your funds for some time if you want to move it to another account within Schwab or outside.
- It is still a for profit publicly traded company that has other ways to make money irrespective of fee-free trades it provides.
- $0-$25 to buy or sell stocks/etf’s depending on account size (Not free yet).
- $0 to buy or sell Vanguard ETF’s and mutual funds plus some third party etf’s.
- Some Vanguard mutual funds have 1-3K USD minimum requirements to start buying.
- Incentive aligned with average investor. Not a for profit company.
- Free analyst reports from Argus and Market Grader.
Before Oct 2019, I used to have Robinhood as my second choice broker. Mostly because of their fee free stock trades. I used to recommend them over other big brokers for most beginners in investing. However starting 2019 October, most big & best online brokers decided to offer fee free trades. So Robinhood is now out of the picture. In comes Vanguard. This company has also been around since 1975. I mentioned above in shortfalls of Schwab that they are still a for profit, public company and need to generate profits. Vanguard is a company that is held by investors who invest in Vanguard funds. So there is no incentive to generate any profits. You can read more about their structure here. J L Collins also wrote a very nice article on why he trusts Vanguard with his money. Vanguard’s ownership structure allows it to operate at cost and charge minimum expense ratios to make sure it covers expenses. This is what separates Vanguard from rest and makes them one of the best online brokers.
- People who want to invest in index and mutual funds only. Vanguard’s funds are the most famous and have some of the least expense ratios.
- Vanguard is a big proponent of long term investing in index funds. So their platform is really focused on dissuading people from trading in individual stocks. Their fee structure, research, basic guides are all focused on long term investing. In my opinion this is a big positive for us everyday retail investors.
- Not the best online broker if you buy individual stocks.
- Their mobile app/web application is very basic. No frills, no big features. Good to check balances and place a trade. That’s about it. Don’t expect Vanguard to provide latest features you see elsewhere in other broker mobile apps.
Pitfalls about commission free trading
With most of the best online brokers offering commission free trading, there are things to be aware of. Commission free model encourages trading. It removes a psychological block in your mind and encourages you to be more open to sell/buy stocks based on daily stock prices. A lot of my friends who started with Robinhood app, buy and sell daily because they feel there are no problems since the fee is 0$. 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 invest any which way you want. All I am saying is you need to have an approach and be disciplined when investing.
Another problem for brokers is they still need to make money. They are not in charity business after all. Most brokers like Schwab, Fidelity etc. already have banking divisions. They make money using the interest rate spreads on the cash in your trading account. You get very low interest on the cash you save with them for investing. They lend it to people at higher rate, pocketing the difference. Vanguard is a rare anomaly here as it moves all of the cash in your trading account to a money market fund that gives you market interest rate while it waits to be invested. Brokers also have an incentive to make money on spread between bid and ask prices for any order you place. When you place an order they might direct your order flow to high speed frequency traders and get some commission from them. This might result in you not getting the best price for your order. These might not be a huge concern if you do not trade often and invest for long term. Just be aware that brokers still have to make money and they are probably making you pay one way or another.
Apart from these 2 picks, there are a few others who always feature in most lists of best online brokers I found during my research. However, I haven’t used them so I cannot write helpful descriptions on them. If you would like you can also look to Fidelity (for best retirement planning/investing) TD Ameritrade (for good data and options platform). 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. They might even give you bonus money to move your account. 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, choosing an online broker comes to your requirements, investment style & philosophy etc. If you like the customer service and more options available to you, go with either Schwab/Vanguard. Schwab has more features and research if you would like to venture into individual stock investing. Vanguard is the best solution to keep everything on auto pilot and investing in index funds without applying much brains. You can even have both accounts. No harm in that. I do! My aim was to just elucidate some factors on which you can base your decisions.