Want to jump straight to the best? Most of our users prefer Interactive Brokers for stock trading.
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.
Table of contents [Show]
- Overview of an Online Broker
- How Does an Online Broker Work?
- How to Open an Online Broker Account
- Online Broker Fees
- Types of Online Brokers
- Risks Associated with Online Brokers
- Customer Service from Online Brokers
- What to Consider when Choosing an Online Broker
- Final Thoughts
- Frequently Asked Questions
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.
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
SoFi’s mission is simple: to help reach clients like you reach their financial independence and realize their ambitions. SoFi knows that this independence comes from making decisions that help your money start to work for you in the long run. The brand helps individuals make these decisions through personal financial products such as personal loans, student loans and automated and active investing.
The brand additionally provides in-person experiences such as educational and networking events, personalized guidance from experienced financial planners and one-on-one advising with professional career coaches. SoFi’s services have been highlighted in outlets such as Forbes, Medium, and CNBC’s Make It.
- IPO Investing
- Mobile Investing
- U.S.-based customer service
- Highly-rated mobile app for iPhone and Android
- Only available in the U.S.
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
eToro is a broker that offers access to over 25 of the world’s most popular cryptocurrencies, forex and over 1600 stocks. They have a few unique education and useability tools. Traders can begin buying and selling in as little as 10 minutes.
eToro’s unique CopyTrader feature allows new investors to “copy” the buy and sell orders of professional investors, while the company’s eToro Club feature provides investors with a range of additional education tools and resources.
- Traders looking for an easy-to-use platform
- Traders who want to practice their trades using a virtual account before entering the market
- Simple platform that is easy to master
- CopyTrader feature that allows new traders to copy the same strategies used by professionals
- Virtual dummy account that gives you $100,000 to practice trades
- High non-trading fees
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.
- Active traders
- Derivatives traders
- Retirement savers
- Sophisticated trading platforms
- Wide range of tradable assets
- Exceptional customer service
- Limited currency trading
- Higher margin rates than competitors
- No paper trading on its standard platform
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
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.
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.
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.
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Nothing in this material should be construed as an offer, recommendation, or solicitation to buy or sell any security. All investments are subject to risk and may lose value.
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.
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.
If you don’t plan to trade frequently, you should choose a broker who does not charge inactivity fees.
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.
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.
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.
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).
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.
Frequently Asked Questions
What factors should you think about when choosing an online broker?
You need to consider the fees, customer service, speed of executions, tools, support and minimums.
What are the fees for online brokers?
Online brokers have fees for margin accounts, broker-assisted trades, inactivity and withdrawals.