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What is an Online Broker?

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The definition of an online broker is an intermediary between a buyer and seller of a financial instrument. They 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. Read on to learn more about online brokers, including which one is right for you.

Overview of an Online Broker

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.

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 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 parties. 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 3 days to exchange the cash and the shares. The money due to a seller will automatically be credited to his or her account.

How to Open an Online Broker Account

In order to participate in online trading, you need 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.

Check our picks for the best online brokers for beginners. 

JP Morgan Chase
Commissions
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Get started securely through JP Morgan Chase’s website
Commissions
$0
Account Min
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1 Minute Review

Chase You Invest is the retail brokerage arm of JP Morgan Chase, the largest bank in the United States. While most of the firm’s products are targeted toward wealthy clientele, You Invest gives novice investors a chance to learn about markets, select the best securities and plan for future goals like retirement. No futures, forex, or margin trading is available, so the only way for traders to find leverage is through options. 

Not all investors will appreciate the basic setup and simplistic trading suggestions, but plenty more want to learn about markets but just don’t know where to get started. Chase You Invest provides that starting point, even if most clients eventually grow out of it.

Best For
  • Investors using Chase banking products
  • Mobile traders
  • Retirement savers
Pros
  • Easy to navigate
  • Functional mobile app
  • Cash promotion for new accounts
Cons
  • No forex or futures trading
  • Limited account types
  • No margin offered
Commissions
$0
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Compare Brokers securely through eTrade’s website
Commissions
$0
Account Min
$0
1 Minute Review

E*TRADE is an online discount trading house that offers brokerage and banking services to individuals and businesses. One of the first brokers to embrace online trading, E*TRADE not only survived both the dot-com bubble and Recession — it thrived. You can choose from two different platforms (one basic, one advanced). E*TRADE is a suitable broker for traders of most skill levels, whether you want to buy mutual funds and hold them for decades or dabble in options swing trading. E*TRADE offers a library of research and education materials to help you out.

Best For
  • Active traders
  • Derivatives traders
  • Retirement savers
Pros
  • Sophisticated trading platforms
  • Wide range of tradable assets
  • Exceptional customer service
Cons
  • Limited currency trading
  • Higher margin rates than competitors
  • No paper trading on its standard platform
TD Ameritrade
Commissions
$0 $6.95 for OTC Stocks
Account Min
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Get started securely through TD Ameritrade’s website
Commissions
$0 $6.95 for OTC Stocks
Account Min
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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.

Best For
  • Novice investors
  • Retirement savers
  • Day traders
Pros
  • World-class trading platforms
  • Detailed research reports and Education Center
  • Assets ranging from stocks and ETFs to derivatives like futures and options
Cons
  • Thinkorswim can be overwhelming to inexperienced traders
  • Derivatives trading more costly than some competitors
  • Expensive margin rates
TradeStation
Commissions
$0
Account Min
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Get started securely through TradeStation’s website
Commissions
$0
Account Min
$0
1 Minute Review

TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.

Best For
  • Advanced traders
  • Options and futures traders
  • Active stock traders
Pros
  • Comprehensive trading platform and professional-grade tools
  • Wide range of tradable securities
  • Fully-operational mobile app
Cons
  • Confusing pricing structure to leave new traders with a weak understanding of what they pay
  • Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
Interactive Brokers
Commissions
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available
Account Min
$0
Get started securely through Interactive Brokers’s website
Commissions
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available
Account Min
$0
1 Minute Review

Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 135 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.  

IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.

Best For
  • Access to foreign markets
  • Detailed mobile app that makes trading simple
  • Wide range of available account types and tradable assets
Pros
  • Comprehensive, quick desktop platform
  • Mobile app mirrors full capabilities of desktop version
  • Access to massive range of tradable assets
  • Low margin rates
  • Easy-to-use and enhanced screening options are better than ever
Cons
  • Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources

Online Broker Fees

Online brokers charge a fee for the services they render, including for their website and infrastructure, relaying orders to the market, settling orders, and more. 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 and Merrill Edge.

Check out our picks for the best full-service brokers.

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

Check out our picks for the best 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.

Check out our picks for the best robo-advisors brokers.

Risks Associated with Online Brokers

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 from Online Brokers

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. 

What to Consider when Choosing an Online Broker

Minimum Account Balance

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.

Investing Goals

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 investing goals.

Trading Frequency

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

Guidance Neededd

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 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 by Online Brokers

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

Promotions/Bonuses 

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 

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).

Final Thoughts

An online broker is a great way to start investing in your future. Whether you’re casually investing to plan for retirement, or looking to get into advanced markets like forex, there is an online broker for you.

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