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The Short Answer

Choosing Between Online Discount Brokerage Firms

Keeping these considerations in mind can help narrow down the choices.

Question: I am relatively new to investing and want to open up a brokerage account. The convenience of an online brokerage is appealing, but the sheer number of options overwhelms me. What are some key things to consider when deciding among discount brokerage firms?

Answer: For self-directed investors (that is, those who don't need or want advice), discount online brokers offer a fast, easy, and cheap alternative to full-service brokers.

But choosing the right brokerage firm involves sifting among many features, which we've detailed below. It is not likely that a single brokerage firm will fulfill the best of all worlds. But also note that some criteria will matter more to certain investors than others.

Accounts Types and Minimums
What type of account are you looking for? You can open an IRA or taxable brokerage account with almost any discount brokerage. But if you're looking for a more specialized account type, such as a SEP IRA, you may have to shop around.

Moreover, account minimums will vary by firm based on the account type you choose. Click here for a list of discount brokerage firms that offer no minimums for traditional IRAs. To compare account minimum requirements for different accounts at varying firms, click here.

Investment Options
Before you set up an account, consider what you plan to invest in--index funds and exchange-traded funds, traditional mutual funds, stocks, bonds, or options. Once you know that, focus on those firms that have the broadest array of that investment type at the lowest possible cost. For example, if you plan to focus on ETFs or index funds, your best bet will be to invest in a brokerage firm that specializes in those vehicles.

Trading Commissions
In addition to considering the availability of various investment options, also consider the charges you'll pay to buy and sell.

If you're focusing on mutual funds, you'll generally get the best deal on the so-called house brand of funds or ETFs at a given brokerage. For example, Fidelity brokerage customers can trade Fidelity funds with no extra charges, and Vanguard investors can buy and sell Vanguard funds without paying any extra fees. But firms may also allow you to buy and sell funds from other firms with no additional charge. For example, Fidelity investors can trade 25 iShares ETFs on a commission-free basis, and many brokerage firms also have select lists of non-house-brand funds that their clients can buy and sell without paying a commission.

As you evaluate commissions, bear in mind your own trading style because that will determine how much importance to place on trading commissions. If you're a frequent trader, you'll want to find the cheapest price out there. (Just be sure to stay attuned to whether you're actually adding or subtracting value with that frenetic strategy.) But if you plan to keep it simple and just let your investments ride, then commissions may not matter as much. Other considerations, such as breadth of the investment lineup and ongoing account fees should be more important.

Account size also plays a role when determining the importance of commission rates. The smaller your trade, the more significant any commissions will be, in percentage terms. In an IRA account, for example, given that your contributions are already limited for a retirement account, transaction fees become a magnified concern since over time, fees can chip away at your account balance significantly. If you hold margin debt, you may be charged an interest fee, as well.

 

Fees
In addition to fees to trade securities, be sure to read the fine print to identify any additional charges. These fees can run the gamut--maintenance, activation, monthly fees, custodial fees, conversion fees, transfer-out fees, as well as inactivity and termination fees. Keep in mind, too, that some discount brokerages charge a fee for dividend reinvestment.

Level of Advice
Discount brokers are geared toward do-it-yourself investors. But for those who don't need a lot of ongoing advice but need some level of handholding, they might still be able to receive it via an online discount brokerage. Just be aware that the more live guidance a brokerage firm offers, the more expensive the services are apt to be. (Some firms throw in discounted or even free advice for clients with account balances over a certain level, however.)

Speed of Execution
Will trades be broker-assisted or executed by phone or electronically? How quickly can trades be executed? If you're an active trader, trading efficiency is a key consideration. Check out individual firms' policies for more information.

User-Friendly Interface
Online brokerage firms may allow you to print out portfolio reports to view your account balance as well as any realized and unrealized gains, and dividend records. If the firm offers online trading and/or a mobile trading platform, make sure that it is easy to use and navigate. For those who aren't as technologically savvy, it may be counterproductive to sign up with online brokerage firms that boast a ton of bells and whistles but require some tech-savvy to maneuver.

Research Capabilities
Do you plan on doing your own research on other websites, or are you looking for your brokerage firm to provide significant research and/or educational resources? Firms may offer research on individual securities, as well as a wide range of tools such as portfolio builders as well as fund/stock/ETF screeners. A discount broker may offer some attractive research capabilities, but it may be not be worth paying the extra money for research that may be available elsewhere for free.

If research reports for individual securities are available, make sure that they are easy to read. Check whether profits and losses are easy to discern and whether the graphs are useful and easy to understand?

Additional Services and Perks
Nowadays, many online discount brokerages have local offices where you can go for additional guidance regarding any aspect of your account. Free services may also include checking and bill-pay services, and debit cards that allow you to draw from a money market account.