Fees, reliability, and trade execution are only a few of the variables to consider when choosing the best online stock broker for beginners.
Online brokers are competitive and fierce now, and now is the best time to turn to investing with costs coming down and services ramping up. However, the ever-increasing demand for online brokers has led to the emergence of new firms in the space, wanting to capitalize on the surge in retail investors. This makes it hard for investors to choose the right one.
So how to choose the best online stock broker for beginners? There are numerous factors you need to consider, all the while keeping your personal priorities in mind. While for some, a state-of-the-art platform is important no matter the cost, others might put costs as the primary deciding factor. Some might want to go ahead with the largest financial institutions with heavy name recognition, while others may be interested in sifting through smaller brokers for their perfect fit.
No matter which broker you go ahead with, the search starts with knowing your investing goals.
Choosing the best online stock broker for beginners
First, start by answering a few questions about your investment goals before you start going through online brokers. Are you looking for some individual stocks or a long-term retirement fund? Are you interested in day trading or a more advanced investment strategy? Once you are sure about the types of investments you want to go for, you can start evaluating brokers based on some factors:
- Account minimum.
- Account fees.
- Pricing and execution.
- Tools, education, and features.
Consider the commissions on the investments you will use most
Brokers generally offer a similar set of investment options:
- individual stocks,
- mutual funds,
- exchange-traded funds
- and bonds
Some brokers will also offer access to crypto, future trading, and foreign currency exchange markets. The investments offered by the broker dictate two things: the satisfaction of your investment needs and the fee you will pay. Pay attention to the commissions that come with the investments you are interested in.
There are brokers still charging a commission to buy and sell stocks; it can be per trade or per share. But mostly, online brokers don’t charge commissions anymore.
Reliability of the broker
Out of the wide range of brokers out there, some have been around for years, while some are new to the trade. But it does not necessarily mean that new ones are not trustworthy. Because if they are handling other people’s trades, they are regulated by the Securities and Exchange Commission and are associated with a self-regulatory body like the Financial Industry Regulatory Authority. However, it does mean they are not proven enough in different stock market scenarios.
Let’s take the GameStop trading frenzy of early 2021; for example, many brokerages restricted trading in some form, while there were others that did not because it’s pretty complicated and mostly not uniform across all brokerages. However, the largest, established brokerages had enough capital with them to guarantee that clients’ trades would go through (a guarantee that regulators require). The brokers with a lack of cash to cover capital requirements had to resort to imposing trading restrictions.
If this concerns you, consider investing with a large institution. But if you are only after a no-frills investment account and such events don’t affect your investing strategy, then you can go for smaller brokers.
There are plenty of highly ranked brokers without any account minimum. But there are brokers that require a minimum initial investment; it can be $500 or more. Many mutual funds require a similar minimum investment, meaning even if you are able to open a brokerage account with little money, it could be a real struggle to invest it, although it is not impossible.
There is no way you can avoid account fees entirely, but what you can do is minimize them. Most brokers charge a fee for transferring investments or cash or closing your account. If you are transferring to a new broker, then the new company might offer to reimburse your transfer fees, if only up to a limit.
Other fees can be sidestepped by choosing a broker that does not charge you or by opting out of services that are costly.
Common fees you need to watch:
- annual fees,
- trading platform subscriptions,
- inactivity fees,
- and extra charges for research or data.
Pricing and execution fine print
Brokerages now offer free trades so that cost is not as much of a consideration. But let’s consider active traders who want their trade executed at the best price possible, even by a difference of a few pennies. The controversial payment for order flow, whether the broker accepts it, and the charges levied for it may be a factor when choosing the best online stock broker for beginners.
Understanding the payment for order flow
When placing a trade with the broker, the broker may send the trade to a third-party market maker, basically a large financial institution or bank that actually carries out the trade, connecting buyers and sellers.
Market makers earn money by buying a security from a seller and selling it to another buyer for more, mostly for a difference of pennies. But when conducted on a huge scale, those pennies add up to major revenue for the market maker. It is best for market makers that brokers send them as many trades as possible. They might even pay brokers to send trades their way to accomplish this. And if the broker accepts the payments and routes trades to the paying market maker, the broker essentially accepts payment for order flow.
Tools, education, and features offered.
Look for a brokerage with free educational resources like webinars, how-to guides, video tutorials, glossaries, and more. Moreover, if you wish to continue learning about advanced trading strategies like options, research how well the firm supports investors in understanding the risks involved in such strategies. We are talking about an on-call guidance support team, a live chat function, or clear and detailed instructions about using these investment products responsibly.
Look at fractional shares as well; these allow investors purchase stock or ETFs by the dollar amount instead of the number of shares. This is particularly helpful for investors without much money to invest but who want to build a diversified portfolio or want to set up a dollar-cost averaging strategy.
Active traders might want a little more from their brokerage account. So, choose a broker based on your needs, and if you are not interested in the types of tools and resources offered to you, do not pay extra for them.