How to Choose an Online Broker and Invest Online

A little over a decade ago. investing meant calling your broker on the telephone and ordering a trade. Online investing changed all that. Now, all you have to do is place an order, click a button, and wait for it to be executed.

Low commissions, linked accounts, and easy navigation have made it easy to invest online. The real trick is choosing the right online broker for your investment style. Hidden fees, complicated pricing structures, and a wild variety of offerings can make choosing an online broker a difficult process. In this article, we will try to make the selection process easier. That way, you can start investing online with confidence, and let the market—not your online broker—be the only system to take your money away.

What is an Online Broker?

An online broker provides a trading platform through which you buy and sell stocks, funds, bonds, and other investments. You can track your investments’ performances, your portfolio’s success, and market news. You can also do simple research on potential investments. Some platforms offer perks like analyst reports, forums, educational panels, and other types of research. Online brokers generally take smaller commissions than full-service brokers. Most online brokers don’t offer investment advice.

Things to Know Before Selecting an Online Broker

The North American Securities Administrators Association lists some important points that will help you stay informed before you start investing online:

1. Understand that you’re probably not linked directly to the market through your home computer. A click of the mouse does not instantly execute trades. Similarly, your online broker may not offer real-time prices—check to see if they do.

2. Check your online broker’s site to see how they get the best price for investors. Most will tell you.

3. Does your online broker charge high fees for market, limit, and stop loss orders? Some do. Check their website.

4. What are the online broker’s privacy and security policies? Some use your name for mailing lists or promotional purposes, even for third-party companies. Make sure you are comfortable with this before signing up.

5. Is your online broker legitimate? Your local securities division will be able to verify the broker’s registration status and disciplinary history. You can find your nearest regulator here.

How to Choose an Online Broker

Many online brokerages are designed with a certain niche in mind. For example, Vanguard targets mutual fund investors. TD Ameritrade markets towards older investors. ING ShareBuilder is set up for casual investors. OptionsXpress puts forth special consideration for options and futures traders. Spare yourself future headaches by matching your own needs with your broker’s specialties before investing your money.

New Investors

If you’re new to investing, consider a full-service discounter, like Charles Schwab or Fidelity. The personal advice offered by full-service brokers will help you gain confidence in the market. Such brokers help you pick a stock, plan your taxes, plan a long-term portfolio, and allocate your assets. The downside: You pay for the better service with higher commissions.

Passive Investors

Passive or small-time investors—those with little cash to put into the market—might consider deep discounters with no account minimums, like ING ShareBuilder. If ShareBuilder’s limitations on active trading prove too stifling, deep discounters like Scottrade only require $500 minimums while offering low trade commissions. If you’re into funds, Vanguard is one of the top index fund suppliers on the market, and definitely worth considering as a first choice for passive investing.

Long-Term Investors

If you’re conservative with your money, or just want to feel like it’s in safe hands, fund specialists like Vanguard, Fidelity and T. Rowe Price might fit your needs. Their fee structures are set up to encourage buy-and-hold behavior while discouraging active trading. Moreover, their interfaces are set up to help you follow your investments’ long-term behavior and plan for retirement.

Active Investors

If you’re an independent investor focused on short-term trades, you don’t want to pay high commissions. Discount brokers like TradeKing and Scottrade offer low commissions and quick order execution. ING ShareBuilder, on the other hand, charges an extra fee for executing trades that don’t fit their preset schedule, making it a poor choice for active investors.