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What is an Online Broker?

For the first time ever, the 30-stock Dow Jones Industrial Average scaled the psychological resistance of 24,000. The blue-chip average is up over 22 percent in the year-to-date period.

Who can resist making some quick bucks by riding the rally in the markets? Although gaining exposure to an overbought market is a risky proposition due to staggering valuations, one can still find bargains, if he/she has time, effort and is stock-picking savvy. 

However, very few traders have these resources. Enter: A broker, an intermediary between a buyer and seller of a financial instrument to facilitate the purchase/sale for a fee or commission. With the advancement of technology, traders and investors alike can transact online, courtesy of online brokers.

Online broker: Defined

By definition, an online broker is one which facilitates buying and selling of a security over an electronic network. The transaction is usually effected through the broker’s proprietary trading platforms.

This is opposed to the traditional method of placing orders via phone call.

Online brokers began to gain in popularity in the mid-to-late 1990s, facilitated by the development of high performance computers and faster Internet connections.

The advantages of using an online broker

Online brokers take the personal bias out of the equation, while traditional brokerages are often said to promote a standard package of investments, with some of them even blamed with promoting their partnered mutual funds.

Online trading is convenient, as you can place orders, check quotes and make changes from anywhere. It is also facilitates faster execution of traders, helping to take advantage of the volatility in a better manner. Above all else, online trading is more cost-effective compared to trading through a traditional broker.

How does an online broker work?

Once you key in your order with your online broker and the order is placed in the database, it checks the different markets, including the NYSE, NASDAQ and ECNs, or electronic communication networks, which connect buyers and sellers.

The market that successfully matches the buyer and seller sends a confirmation to the brokers of both the buyer and seller. The order, and the price at which it is executed, is made available to regulators as well as market participants. Once an order is executed, the exchange sends a contract to the brokers of both the buyer and the seller.

The brokers then do a T+3 settlement, meaning they have three days to exchange the cash and the shares. The money due to a seller will automatically be credited to his or her account.

Opening up an account

In order to do online trading, one needs to open an account with an online broker. The right choice is key here. Once you zero in on a broker, you need to fill an account opening application form and provide documents for identity proof. The various documents/details you may be required to submit at the time of opening an account are:

  • 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

You also need to decide the method for funding your online account, which can be through electronic fund transfer, wire transfer, checks, stock certificates, etc.  

Online broker fees

Online brokers charge a fee for the services they render, including providing the website and infrastructure, relaying your orders to the market, doing settlement when an order is matched, etc. The brokers may also be charged a fee by the exchanges to use their infrastructure and connect to them, while they may also have to pay for interfacing with the banks for monetary transactions.

  • Trading fees: This fee is charged on every trade you make.
  • Fee for broker-assisted trade: In case you need assistance from the broker in the form of advice etc., fee levied will be substantially higher than the regular trading fee for self-directed trades.
  • Account maintenance or inactivity fees: This is an annual fee charged for maintenance of your account and can range from $20 to $50. It is usually charged when your account balance falls below a minimum.
  • Margin: Sometimes the broker lends money to the clients for trading. You will be charged interest on the amount loaned by the broker.
  • Withdrawal fees: Some brokers levy withdrawal fees when you withdraw cash from your account.

Types of online brokers

Full-service brokers

A full-service broker offers a range of services, including trading, investment advice, research, retirement planning, tax tips, etc. Given the wide range of services they offer, the fee involved is relatively high when compared to a discount broker.

However, they serve as one-stop shop for all investment-related services. This category of broker may be apt for a beginner who is just starting out and needs some hand holding and resources to help him make informed investment decisions.

Some of the sought-after full-service brokers include Charles Schwab, Fidelity Investments, Edward Jones, Raymond James, Merrill Edge, UBS and Wells Fargo.

Discount Brokers

As the name suggests, these brokers service their clients at a discounted fee when compared to a full-service broker. However, their service is limited to just assisting in trading and does not include investment advice, research or retirement, estate or tax planning.

TD Ameritrade, Scottrade, E-Trade, Interactive Brokers, and TradeStation are some of the popular discount brokers.

Robo-Advisors

Robo-advisors are online platforms that offer algorithm-driven trading, with very little human element involved. These brokers operate by soliciting some basic information from their clients, including their present financial situation, investment goals, etc., and then use the information for advisory services or automatically invest client assets.

Cost-competitiveness, 24/7 availability, relatively small account balance requirement and efficiency are some of the advantages of using a robo-advisor. However, one may not be able to get personalized service from a robo-advisor.

Betterment, Stash, Swell, FutureAdvisor and Personal Capital are some examples of robo-advisors.

Factors to consider when choosing an online broker

Money at your disposal 

Most online brokers have a $1,000 or more minimum account balance requirement. If you’d like to start with less, you need to scout around for brokers which mandate very little or no account minimum. The more money you have at your disposal, the more diversification you can hope to achieve.

Your investment objective

Investment objectives of an average investor may range from safety to income growth to retirement savings to tax minimization. You need to decide on an online broker that suits your investment objective.

Trading frequency

If you don’t plan to trade frequently, you should choose a broker who does not charge inactivity fees.

Degree of guidance needed

If you are 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 well with a discount broker.

Execution speed

Given the volatility and rapidity associated with stock moves, a platform that allows fast execution of trades is essential for making profits. It pays well to check out how fast a particular broker’s website launches, even during peak hours.

Commissions and other fees

A careful analysis of commissions and other fees associated with brokers is very essential for cutting down on your trading costs. Often, brokers charge a low commission and advertise themselves to be the cheapest option available but load up all the charges onto other fees. Therefore, a careful analysis of the commissions as well as the other fees is a must.

Customer service

Discount brokers, in the name of cutting overheads, may not offer the best customer service. Look out for those online brokers that offer customer service around the clock and not just during business hours. Analyze the various forms of support available, such as live chat, telephone support, email, etc.  

Other services offered

Some brokers offer other financial services such as checking accounts and credit cards.

Promotions/bonuses offered

Although promotions could make one sway toward a particular online broker, it’s important to take a look at the bigger picture. The benefits of a big promotional offer may be completely offset by higher commissions and fees.

Range of asset classes offered

An online broker offering a wide range of asset classes, including stocks, bonds, CDs, currencies, commodities, options, futures, ETFs and more is a better bet. All of these types of asset classes will come in handy in order to build a diversified portfolio (and mitigate risk).

Risks

The speed associated with trading online can work as a double-edged sword, as it can lead overenthusiastic traders to make costly mistakes. This risk can be mitigated to some extent by setting up safeguards, such as placing limit orders.

The lack of handholding could spell trouble for some traders, especially when building a portfolio or rebalancing.

There are also concerns regarding security, as online transactions expose you to account hack risks. Technical glitches could also result in overpaying or clocking in excess losses.

Customer service

With the pretext of cutting down on overheads, online brokers often offer limited customer service, relative to full-service brokers. Sometimes, customer service is compromised in favor of convenience and speed. It’s crucial for you to determine how important that is when you make your online broker selection. 

Investment Style
Tradable Securities
What's most important?
Broker Best For Commissions Account Minimum Choose your platform
  • Beginner investors
  • Advanced traders
  • Investors who want portfolio-building advice.
$6.95 $0
Get started securely through TD Ameritrade's website
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
  • Superior technology
  • No account minimum balance
  • Excellent customer support
  • Premier data and news partnerships
Cons
  • Slightly higher commissions
  • Can be for more advanced users
Current Promotion

Trade Free for 60 days + Get up to $600 with Trade Architect from TD Ameritrade.

  • Active traders
  • Beginners looking to start trading
  • Low fees
  • Penny stocks
$4.95 volume discount available $0
Get started securely through Ally Investment's website
1 Minute Review

If investors are on the hunt for a bargain broker, Ally Invest could be the one. With low commissions across the board, Ally Invest (formerly TradeKing) stops potential investors in their tracks with its especially low mutual fund commissions. Commissions on stocks and ETFs are notoriously inexpensive as well, and for more active traders or those with larger account balances, commissions can dip as low as $3.95 per trade.

Pros
  • Volume discounts available
  • Among the lowest fees in industry
  • Good for every experience level
  • Excellent customer service
Cons
  • No commission free ETFs
  • Lacks physical locations
Current Promotion

$3.95 per stock trade for Active Traders at Ally Invest

  • Mobile traders
  • Traders looking for research and data
  • Investors looking for retirement planning guidance
$6.95 for fewer than 30 trades/quarter. $4.95 for 30 or more trades/quarter $0
Get started securely through eTrade's website
1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

  • Intermediate investors
  • Retired investors
  • College students
0.25% annual fee $0
Get started securely through Betterment's website
1 Minute Review

Offering personalized investment strategies, Betterment tailors customer portfolios based on a host of factors such as goal type, risk tolerance, account type, time horizon etc. The firm focuses on tax-efficient investing at all stages, which is its unique selling proposition.

Pros
  • Built in tax-saving strategies
  • Automated rebalancing
  • Personalized service
Cons
  • Lack of customization
  • Other Robos can be free
Current Promotion

None at this time

  • Retirement investors
  • Active traders
  • Premium research
  • Low fees
  • No-transaction-fee mutual funds
$4.95 $0 for IRAs. Some accounts may require a minimum opening balance of $2,500
Get started securely through Fidelity Investments's website
1 Minute Review

Fidelity's customized market research for individual investors is unmatched. Fidelity is best for experienced traders willing to make a minimum 36 trades per quarter. Not only does Fidelity offer 24/7 customer support, there are branches nationwide that offer in-person seminars and webinars to ensure that customers are always informed on the latest market research and technologies.

Pros
  • Low cost trade commissions
  • Commission free ETFs
  • Excellent customer support
Cons
  • Platform can be complex
  • Minimum investment balance of $2,500
Current Promotion

Commission-free trades good for 2 years

  • options traders
  • Frequent traders
  • Penny stock traders
  • No account minimum
  • futures traders.
$4.95 $200 minimum equity balance required to maintain an IRA.
Get started securely through OptionsXpress's website
1 Minute Review

optionsXpress is a great tool yourself on stock options trading. The Virtual Practive Trader gives the customer 25,000 virtual trading account to test trading strategies and gain experience without putting any money on the line. With customer support from Charles Schwab optionsXpress offers broker assisted trades and a pleathora or educational tools when a trader is ready to enter the stock market.

Pros
Cons
Current Promotion

Customers who open a new account and transfer at least $5,000 from another brokerage earn 50 commission-free trades.

  • Beginner investors
  • Advanced traders
  • Investors seeking commission-free etfs
$4.95 $1,000 waived if you set up an automatic monthly transfer of $100 through direct deposit
Get started securely through Charles Schwab's website
1 Minute Review

Charles Schwab is known for high quality competitive trading platforms, a large selection of commission-free exchange traded funds and no-transaction-fee mutual funds. Consistently winning awards with J.D Power, Fortune, and Inventors Business Daily, Charles Schwab is praised for its heritage of innovation, modern wealth management capabilities and customer service.

Pros
  • $4.95 standard trade commissions
  • Powerful research tools
  • Low cost index funds (no minimums)
  • Excellent customer service
Cons
  • $1,000 minimum balance
  • No Forex
Current Promotion

$100 referral award for first-time clients

  • Great for beginners
  • Lower fees
  • Easy learning curve
0.25% annual fee $500
Get started securely through Wealthfront's website
1 Minute Review

At Wealthfront we believe that everyone deserves access to sophisticated financial advice, without the hassle or the high fees. So live the life you want.

Pros
  • Amazing platform
  • Low fee structure
  • Automatic tax-loss harvesting
Cons
  • No partial shares allowed
Current Promotion

None at this time

  • Commission-free trading
  • Bank of America customers
  • High-balance customers
  • Investors who value customer service
  • Penny stock traders.
$6.95. Customers who maintain combined balances of $25,000 or more in Bank of America deposit accounts or combined balances of $25,000 or more in Merrill Edge self-directed accounts can qualify for up to 30 commission-free trades per month. $0
Get started securely through Merrill Edge's website
1 Minute Review

Merrill Edge is a great option for a casual trader and Bank of America customer. The customer is able to log in the their Bank of America account and view their invesments in one seamless step. Merrill Edge has one of the best customer support systems with 24/7 phone, live chat, e-mail support as weel as over 2,000 Bank of America locations.

Pros
  • Seamless integration with Bank of America
  • Self Directed investing options
  • No surcharges for stocks that trade under $1
Cons
  • Lacks no-fee ETFs
  • Dated and Sluggish user interface
Current Promotion

Cash bonuses ranging from $100 for deposits of $20,000 to $49,999, to $600 for deposits of $200,000 or more

  • Day traders
  • Penny stock traders
  • Forex traders
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available $10,000 $5,000 for IRAs, $3,000 for clients 25 or younger
Get started securely through Interactive Brokers's website
1 Minute Review

If you’ve got $10,000 and you consider yourself a sure-footed professional trader, Interactive Brokers might a major possibility for you, particularly if you’re adept at navigating tricky trading platforms (can you say 124 option indicators?) or have done more than just dipped your toe a “coupla times” into the complex world of international markets.

Pros
  • Interactive Brokers offers the lowest margin rates in the industry
  • Low pay-per-share commissions on stock trades (up to 1,000 shares) and on options trades (up to 20 contracts)
  • Vast order types options for professional traders
Cons
  • It’s a hefty $10,000 minimum to open an account
  • Account fee charges (including annual, transfer, closing and inactivity fees) and complex trading platform, which can be difficult for beginners
Current Promotion

Lower minimum activity requirements ($3/month) and opening account minimum requirement ($3,000) for clients 25 and younger.