Online investing has become very common, because of its simplicity. There are many brokers that offer the possibility of investing from the convenience of your home.
The only stock brokers I will cover are online discount brokers such as Sharebuilder, Ameritrade, etc. In order to trade online, you have to open an account with an online broker. Number of brokers online is big, and it’s getting bigger every day. This makes it hard for people to chose the one that will suit their needs the best. All of the online brokers have their con’s and pros, so sometimes it is hard to choose the right one. However, there are a few that stand out from the crowd, the ones that have been around long enough and proved themselves worth your attention.
I have made a Comparison Table from which you can see the key characteristics of 4 major online brokers that, in my opinion, are currently the best.
The reason I only cover discount brokers and not full-service brokers is that of the huge price difference. Discount brokers will charge you anywhere from $5-$20 per transactions, where full-time brokers can charge you as much as $150. Alternatively, they can provide unlimited free trades, but charge an annual percentage of your total assets. In any case, you will spend much more money if you chose a full-time broker. However, if you are reading this, you are probably not interested in a full-time broker, as you have decided to learn how to invest and make decisions for your self by purchasing stocks through a discount broker. Good decision.
So, what is a broker?
A broker is a person who handles transactions (mediates deals) for you when you are investing. The term can be used to describe the actual person that you are dealing with one on one or it can be used to describe a firm, such as EF Hutton. ( Some of you may remember the old commercial saying “my broker is EF Hutton and he says”…)
Today you are probably more familiar with Share Builder® or E*Trade® , but if you watch any television or surf the internet, you certainly have seen ads for Merrill Lynch, Paine Webber, Dean Witter, etc. Prior to the internet (in the stone-age) there were very few alternatives for the individual investor apart from dealing with a broker or getting your own license. You would be forced to deal with a broker whether the broker was a “full service” broker, meaning they would tell you what to invest in and would control your portfolio, or a “discount broker” who would charge less, but would only carry out your orders, not give recommendations or manage your account.
Back in “the day” people generally would hand their money over to the full-service broker, pay whatever fees they were charging and hope for the best. The brokers were privy to information not generally available to the public, so people were somewhat limited on the choices they had. We were more or less forced to trust the judgment of the broker and the reputation of the firm.
Brokers also generally made money no matter how your portfolio fared. There were commissions upon sale and purchase and maybe even a consultation fee. “Discount” brokers would give you minimal information and charge low fees, while “full service” brokers would charge more and hopefully make better recommendations, often buying and selling without the “inconvenience” of having to consult with you or get your opinion. Maybe good, maybe not. Who do you trust that completely?
There are also many ways brokers make money. There can be inactivity fees, transfer fees, account maintenance fees, interest charges (for purchases made on margin) loads, no loads, etc, etc. The reason I am putting out this information is to let you know that you need to read the fine print when you enter into an agreement. Take the contract to your lawyer, if you have one. (If you don’t have a lawyer, you should really consider finding one. Legal fees for contract review are very reasonable and can help you avoid unwise decisions.)
Even though we have moved into the information age, much of the information presented above is still accurate. Many of yesterday’s fees are no longer with us, due to the competition among the investment firms. You can still run into unexpected fees, but the cost associated with investing has dropped dramatically with the online investing coming of age. You still need to track your investments, whatever service you use. No one will be as concerned about your money as you will.
Do you need a broker? The answer is still yes, but the level of advice really depends on your education with the market and the experience you have. The new investor should really consider having a name and face to connect with when they have questions. On-line trading has made it very easy to get into the market, with very little initial capital needed. When you are looking for a broker I would recommend on-line trading with solid customer service functions. Many online companies have outstanding customer service departments and some even have brick and mortar back up. Check for a local office, if you feel more comfortable talking face to face occasionally. I am not going to recommend any specific brokerage firms. I feel everyone has to make a choice on their own and figure out what best suits themselves.
The Definition of Unshakeable in today’s economy and investing by Tony Robbins