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How To: Choose an Online Broker

Beginner's Guide to Online Trading 5The good news about trading in the days of iPads and wifi internet, is the sheer number of killer options you have when choosing an online broker. A decade ago when online trading exploded you had just a handful of choices, but these days with so many players in the game we’ve come to expect a lot from our brokerage services.  With so many choices how do you know which online broker is the best for you?

With all the competition brokerages have begun to be divided between discount and full service types. Depending on your trading strategy, you might need a particular type of broker, say, for trading penny stocks vs day trading equities on margin, or handling options, bonds, forex, and other instruments. Having said that, there is nothing to stop you from opening more than one account for different purposes. Maybe one for penny stock gambling and one for more solid long-term investments.

Things to Consider Aside from Commission

BrokerCommission (usually charged per trade) is a concern when choosing a broker but price should not completely dictate your decision.  These days most firms are fairly competitive with each other concerning fees.  If you can get your trades to execute for under $20, I think you’re doing pretty good.  $10, even better.

After brokerage fees some other considerations should be:

  • Always read the fine print. You should know by now companies always try to screw you somewhere within the fine print. Read it.
  • For equities trading most brokerages charge per trade but some (ie: Interactive Brokers) charge a tiny commission per share instead. Be sure to double-check the fees page at your broker for exact commission amounts and fees.
  • If you’re in the USA learn about the Pattern Day Trader Rule.  Basically the rule is that if your account has less than $25k in it, you will be unable to trade more than 3 trades per trading session.
  • If you are planning to hold a portfolio over $25k you should consider a full service brokerage over a discount brokerage. These are sometimes operated by banks or subsidiaries of banks. From my experience, full service brokerages often offer better service and faster execution over discount brokerages, but this isn’t always the case. The same goes for those wanting to trade on margin.
  • Small empires, say under $2500 might want to consider a discount brokerage with sub $10 trades, to get things rolling. You can always upgrade to something more sophisticated later.
  • Watch for promotions running targeting new users. Free trades for 30 days, etc.
  • Large deposits $25k – $50k or more often grant you cheaper commission rates.
  • Some brokerages require a minimum deposit, usually around $10,000. This is not the case with most discount or smaller brokerages.
  • If you are planning to trade on margin, ie: borrowing at interest to buy shares, you will need to closely read the rules, rates, and conditions for doing so.  Most brokerages handle this slightly different, so if you have questions I’d suggest calling your broker or emailing.
  • In the case of options trading, find out what the brokerage charges per contract. $1 or less and you’re looking pretty good.
  • What goodies do they offer? And this is a biggie for me. Do they offer a mobile/tablet app? What is the web interface like? What other bonuses?
  • Don’t forget to do some Google searching for terms like ‘brokerage name sucks’ to get a feel for what disgruntled customers are saying.
  • Can I short penny stocks?  This can be a bit tricky.  There really is only a few online brokerages big enough to *have* the shares to short for most of these stocks.  We’ll cover some of the better ones in the next article.

I hope this list gives you a few more clues deciding which online broker is the best for you. Be sure and check out our own big list of the best online brokers, with quick reviews of a few of my favorites and the firms I personally use.

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About Miles Evans

Miles is a pattern day trader from British Columbia, Canada, and has been actively seeking alpha since 1999. Outside of finance Miles is interested in web startups, programming, and the limitless wisdom of the crowd.

See all posts by Miles