How to Choose a Stock Broker
On a quest for financial independence, a good stock broker can be your best ally. This article aims to help you choose a stock broker wisely.
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If your goal is to retire comfortably, it’s never too soon to start financial planning. And yet, many baby boomers are making the mistake of planning for retirement without an IRA.
But once you decide to start investing, it’s not enough to simply open an account. You also need a plan for how to reach your financial goals.
Investing is a great tool for wealth creation because it allows gains to compound on themselves. Perhaps this is why Albert Einstein famous stated: “Compound interest is the eighth wonder of the world… he who understands it, earns it… he who doesn’t, pays it.”
Compound interest allows your money to work for you. And over the long term, the stock market has outperformed almost all other asset classes. As financial author Robert G. Allen once said, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
Before you start investing, there are some basics that you need decide about your objectives. To do this, you need to think about what type of trading you plan to do.
Will you be an active trader, or do you want to be more of a passive investor? How much do you plan to invest? Are you passionate about a specific industry, or do you perhaps have a list of specific companies you want to invest in?
Once you determine what your trading personality is, then you will have no problem spotting the perfect brokerage firm. There are generally three types of brokerages:
- Full-service broker
- Discount broker
- Online broker
The distinction between and online broker and discount broker is less clear than it once was, as every popular broker today has an online trading platform or a mobile app. Therefore, it may be easier to think of the market as just full-service or discount brokers.
Our guide below gives you quick definitions and tips on how to pick the right broker for your first investment account. These are the majors sections we’ll cover in this guide:
- How to Find a Broker that Suits Your Investment Style
- What are Costs and Fess for Brokerage Accounts
- The Types of Traders
- Top Tips to Pick Your First Broker
- How to Get Started With a Broker
- The Bottom Line
What Broker Suits Your Investment Style? 🤔
First off, we must understand that there are several types of brokers, broadly-speaking, and that they are very different from each other—so much so, that they simply can’t be used for the same purpose. The most basic way to classify them is in two categories: Full-service brokers and discount brokers.
Full-Service Brokers 🏛️
A full-service stock broker offers you a ton of tools, financial advice, and account management options. Full-service brokers provide access to a broader suite of financial products and services including alternative asset classes, proprietary research, and sophisticated wealth management tools. In exchange, you must keep an account minimum, pay higher trading commissions, and pay a fee for account management.
A discount broker removes all of the financial advisors, some tools, and some account management options (although discount brokers are innovating to add more and more services). You often won’t pay much if any commission fees either. The result is a “do it yourself” approach to investing. Most online brokers today are discount brokers that offer robo-advisors and research tools that you can learn on your own.
Pros
- Lots of trading tools.
- Broad suite of financial products and services.
- Superior account management.
Cons
- High trading commissions.
- You’ll have to pay the account management fees.
Discount Brokers 🪙
There’s also a difference between brokers and broker-dealers. Brokers are firms that help you place a trade, while broker-dealers are what most people would consider investment banks. The SEC requires any firm that buys or sells registered securities to be licensed as a broker-dealer. Therefore, most brokers are broker-dealers (or are affiliated with a broker-dealer subsidiary), but the term applies more broadly to markets like M&A as well.
For instance, TD Ameritrade and Fidelity are fully-compliant online brokers and also maintain memberships with Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SIPC) through their broker-dealers TD Ameritrade Inc. and Fidelity Brokerage Services LLC.
Pros
- Trading commissions and fees are low. Some platforms offer fee-free trading.
- Low account management fees are low. Many platforms require no account management fees.
- Excellent low-cost trading tools.
Cons
- Lack of advanced trading options.
- No human advisors usually.
- Small range of financial products.
Costs and Fees for Brokerage Accounts 💰
You may not have a big budget for investing, but that doesn’t mean you can’t start. While commission-free trades are currently trending, there are other fees to worry about, such as inactivity fees or account maintenance fees. There are also minimums and margin rates to consider. Here is a breakdown of these costs:
- Minimum account balance: Most brokerage firms require that investors set up an account, and while most maintain that you don’t need to keep a balance, others will require that you maintain at least $500 in the account or risk being penalized a low balance fee.
- Margin accounts: If you qualify for a margin account, then you typically have to maintain a higher minimum balance for your account. You may also want to check the current interest rates for margin lending.
- Withdrawal costs: Some brokers won’t allow you to withdraw if it means your balance drops below the minimum. Before you sign up for an account, you should read through any withdrawal requirements first.
Are You a Passive or Active Trader? 😪 🏃♀️
Your investment style will determine the broker that is best for you. For active traders, low fees on high trading volumes are important because you want to be able to buy and sell as much as you like.
Other tools might matter more to seasoned active traders, such as algorithmic and automated trading. Day traders specifically look for brokers that have low fees, fast order completion, high-quality trade execution, and automated trading.
If you’re a passive investor, you may simply be looking for a platform that offers standard stock and ETF trading with no commissions. You may also want to look into retirement planning and find a mutual fund such as a target-date fund that works with your investment style. Brokers that have more tools regarding retirement calculators, tax-deductible accounts, and lower costs may be right up your alley.
🤖 FYI: Long-term passive investors don’t even need to invest through a broker—if you want a low-cost money manager doing 100% of the work, check out what the top robo-advisors are offering.
Top Tips to Pick Your First Broker 💡
You may feel confident as an investor, and you can select and buy your own stocks online or through a mobile app. However, stockbrokers and financial advisors may help you find better stock picks or mutual funds that could help grow your money faster. To find the best broker, you should consider the following:
1. Pick No Commissions or More Advice ✅
Full-service brokers offer the most advice and little risk for new investors. You get the best stock picks, and any bad investments may be traced back to your broker. Some full-service brokers also offer a guarantee to ensure that your money is invested wisely when you let them manage your account. They won’t guarantee you won’t lose money, but they can offer more “hands on” guidance throughout the investing life cycle.
However, discount brokers have eliminated almost all commissions on stock trading and ETFs, which means that you can invest for less and gain a bigger profit. This also means that you are largely on your own if a mistake is made.
2. Accessibility and Investor Support 📞
You should be able to contact the customer support team for the broker during normal trading hours at least. Phone support is the best option when you have a problem, but 24/7 chat assistance is also a plus.
Imagine if a company that currently holds 80% of your wealth doesn’t answer the phone if you have a problem. If nothing else, this is hard on the ol’ anxiety meter, so it’s best to pick a brokerage with excellent customer support with great ratings.
3. Shop Around Before Picking One 🔎
You can set up an account with a number of brokers. You don’t have to pick just one. These first-time accounts could be a way to test strategies and accessibility.
When you’re picking brokers, you also want to look at customer ratings and price improvements. Were investors making more or less with a certain broker last year?
4. Ask for a Referral ✔️
Your finance department probably has some accountants with good knowledge of brokers. However, they may also be advanced brokers for active traders.
Since you are new, you can get help from those who once started at a certain broker. You can also look at the best brokers for beginners to find the best options.
5. Testing Tools and Strategies 🛠️
Since you are new at this, you should get a broker that allows you to test out trades and strategies using “paper money tools.” TD Ameritrade, E-Trade, and other trade simulator apps allow you to use fake money and play the stock market with real-time streaming data. It’s the best way to learn.
6. Forex Trading 💲
If you want to trade in currencies, then you will use a forex broker or FX broker. These brokers trade in currency pairs and typically offer more liquidity. However, there is a risk that you may lose a lot more if you trade on a volatile currency or go into cryptocurrency. In addition, before you get into an exchange, you may want to read our best forex broker guide.
Unlike stocks, forex trading is usually only for day traders—all trades are generally executed very quickly. Note that this type of trading can be tremendously profitable but is also very active. Beginners should be especially careful as inexperience and emotional trading can be detrimental in this line of work.
7. Tax Benefits ✔
IRAs have the most tax benefits because you don’t have to pay any taxes when you withdraw money. You can use these savings accounts to play the stock market and grow your nest egg without losing any profits when you need to retire.
Wrapping Up: What’s the Best Broker for Beginner Investors?
Since you are just learning how to play the market, you should learn about the different assets and markets. In that case, the best brokers maybe those with more educational tools, such as E-Trade, TD Ameritrade, and Fidelity.
As you learn more about trading and become more active, you may switch to platforms that are lower cost and streamlined for advanced trading.
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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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