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Investment brokerage firms can make it possible for you to invest in stocks, mutual funds and other investment securities. But not all brokers are created equal. To find the best online broker for you, it's important to focus on your investment strategy and the features that are most important to you.
In general, you'll be choosing from full-service brokers, discount brokers and robo-advisors. Understanding how each works and what they offer can help you narrow your list down to the best option for you.
What Is an Online Broker?
An online broker is essentially an intermediary between buyers and sellers of stocks, funds and other financial instruments. They can facilitate your trades without needing to meet with you in person or over the phone like a financial advisor; though, like advisors, brokers typically charge for their services in one or more ways.
Online brokers usually offer a lot of convenience, making them appealing to investors, particularly younger investors. There are three types of brokers you may come across:
- Full-service brokerage: These brokers tend to offer more hands-on assistance with your investment portfolio. You may get access to more tools and features and even human advisors. Some may even offer specialized services, such as access to initial public offerings, estate planning, tax advice and more. These brokers tend to charge annual fees, often a percentage of your investment portfolio.
- Discount brokerage: These brokers don't offer much hands-on guidance, but they may provide you with resources that you can use to make better investment decisions. They typically don't charge annual fees but may make money off trading commissions, premium features, margin lending, interest on deposits and more.
- Robo-advisor: Robo-advisors use computer algorithms to manage your money for you. They don't give you as much control over how your money is invested, but they perform a lot of the legwork for you and typically charge low annual fees.
Keep in mind that some brokers may offer all three of these approaches, depending on your needs, while others may only offer one or two. So, avoid writing off a broker without checking out their full list of options.
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Finding the Right Broker for You
The right broker for you depends on a variety of factors, so it's important to know how you want to invest and what features you're looking for before you start comparing options.
1. Decide What's Important to You
Here are some questions to help you determine what to look for in an online broker:
- What are your investment goals?
- Do you plan on being an active investor, buying and selling often, or a passive investor, using a buy-and-hold strategy?
- Do you want to learn how to invest on your own or get help from a human advisor or a robo-advisor?
- What types of securities do you want to invest in?
- How experienced are you with investing, and what types of resources do you need to achieve your goals?
- How much control do you want to have over where your money gets invested?
- How much are you willing to pay if you decide you want help?
- How much money do you have to get started with investing?
2. Consider Services and Features
As you answer the questions above, take a look at the services and features different brokers offer to find the best fit based on what you need. Some of the common features you'll find include:
- Account options: If you want a basic taxable brokerage account, just about any broker will do. But if you're looking for a retirement plan or a specialized type of investment account, not all brokers offer those.
- Advisory services: Discount brokers typically don't offer advisory services, but full-service brokers and robo-advisors do.
- Investment options: If you're just looking to trade stocks, full-service and discount brokers can help you. But if you want to invest in other securities, such as options, real estate investment trusts and more, the selection can vary from broker to broker. Remember, too, that robo-advisors choose your investments based on the information you provide, so you may not be able to invest in individual stocks or other securities.
- Deposit requirements: Some brokers allow you to open an account with as little as no money upfront, while others may require you to deposit thousands of dollars to get started. In other words, your options may be limited based on how much you have to invest.
- Resources: If you're a new investor, you may want to work with a broker that offers more resources in the form of educational content, third-party research, analyses, tools and charts, calculators and more. However, if you've been investing for a long time, you may not need the extra help.
3. Look at the Costs
If you're fine with paying more for more hands-on help, a full-service broker may be the right choice for you, but if you want to pay less, consider a discount broker or robo-advisor. That said, fees can vary within each broker umbrella, so shop around and compare those to maximize your savings.
For full-service brokers, costs can range from 1% to 2% of your portfolio annually, while robo-advisors may charge between 0.25% and 0.50% of your portfolio balance. Discount brokers typically don't charge trading commissions for stocks and exchange-traded funds, but you may incur fees if you invest in mutual funds, options or bonds, upgrade to premium services or engage in margin trading.
As you compare different options, keep these fees in mind to determine which broker is the best fit.
How to Open a Brokerage Account
Once you've decided which broker and the type of account you want, opening an account is relatively easy:
- Apply with the broker. You can usually apply online, but you may also have the choice to submit an application over the phone or in person at one of the broker's physical branches or offices. You'll typically need to provide some personal information, your income and tax status, your investment experience, risk tolerance and other details.
- Fund your account. Once your account has been approved, you'll create an online account and fund it. You can usually do this by connecting your bank through a third-party service or by providing your routing and account numbers. In some cases, you can also perform a wire transfer, write a check or transfer securities from another brokerage account, but some options take longer than others.
- Familiarize yourself with the platform. While you're waiting for your account to fund, take some time to explore the broker's mobile app or online platform to understand how the process works and how to use the various tools and other resources.
- Start trading. Once your funds have cleared, you can start making trades in your account.
The Bottom Line
There are many different online brokers from which you can choose, each one with its own set of services, features and offerings. These steps can help you determine which broker is best, but if you can't narrow down your list to one, you can open multiple brokerage accounts to try them out.
Also, keep in mind that your investment strategy and goals may change over time, and the broker that works best for you now may not be the right broker for you later on. Evaluate your investment approach and broker once or twice a year to make sure it's still serving your needs and make a switch if necessary.