How Do I Choose the Right Online Brokerage Account?

There are tons of companies begging for you to sign up with them.  Ignore the noise and first determine the purpose of your account.

The image below shows the most common options.

I would highly recommend that before anyone opens up a “General Investing” account, I’d be sure to start with a Roth IRA.  A Roth IRA is a post-tax individual retirement account that allows you to pull money out TAX FREE … YES, TAX FREE. if you can wait until you’re 59.5 years old.  Keep in mind that there are income caps on Roths.  So if you’re a high-earner (i.e. balling hard) than a Traditional IRA is for you.  I’ll outline the specifics and different types of IRAs in my “I have a 401k. Good Enough for Retirement..Right?” post.

If your financial situation allows, I’d open up both an IRA and an individual account.

Once you’ve decided on the type of account(s) you’re interested in opening, the next step is to decide on the actual company that will have the privilege of holding on to your hard-earned cash/stock/bonds.  When I was shopping around for an online broker, I thought about three C’s: clarity, cost, and credibility.

Clarity

If you’re not interested day-trading, complex options spreads, shorting companies, or trading on margin, then you don’t need a company that specializes in those strategies.    If in time you decide to go that route, you can always open up another account later on.  Most people simply need a broker that allows them to view the stocks they have, see how they’ve performed over time, and easily enter orders to buy and sell.  The interface should be clean, simple, and void of options to do things you don’t understand.

Cost

Nothing is free in this world, but you can make sure you’re getting a fair deal.  Every time you buy or sell a stock there is a fee.  In the world of investing, these are called commissions.  All things being equal, you want to sign up with a company that…

A) Doesn’t charge you to sign up or any type of maintenance fees!

B) Only charges a small amount per transaction. Small is typically less than $10.

Tip:  Commissions can add up to big money over time.  Try to limit yours by making sure what you pay is less than 1% of the total investment.  For example, if you plan on investing $1000 in XYZ stock and the commission is $4, you’re in good shape (0.4% of the total).  An $11 commission given the same $1000 investment would be not so good (1.1% of the total).

Credibility

There are a million and one companies out in cyberspace promising to offer the best features at the lowest price.  I’m old school.  I want the company to have been around for more than 10 years and to have friends who’ve used the company.  You should also look for the SiPC logo at the bottom of the site.  SiPC is the Securities Investor Protection Corporation.  This organization helps investors get their cash and stock back if the online brokerage goes bankrupt or suffers any financial difficulties.

My Picks  

I’ve listed my picks below and my own two cents.

Sharebuilder.com

For people who just want to accumulate stock, this is my top choice hands down.  Commissions are only $4 if you buy on Tuesdays.  The order must be placed on the previous day and exact stock prices are not guaranteed.  The company only guarantees that the order will be placed on that Tuesday.  I’m pretty sure the company does this so they can group orders together to cheaply buy in bulk.  This is perfect for people wanting to build positions in great companies over time and don’t really care about the stock’s price movement during any one day.  Selling your shares is $9.95 per transaction and can be done easily anytime the market is open.  Sharebuilder is great because you can see all of your accounts (IRA and Individual) in one easy menu.  Your dividends can also be automatically reinvested in the companies that issued them.  If that part sounded confusing, see my post on “What is a Stock?”

Perhaps the best feature of Sharebuilder is its ability to allow you to purchase fractional shares .  That means if XYZ stock costs $12, and you have $1000 to invest, you can actually buy 83.33 shares.  Most companies will require you to buy either 83 or 84 shares at the time of purchase.  This is great for people wanting to invest a certain dollar amount, without worrying about the exact number of shares that money can buy.

All in all, Sharebuilder is not for day-traders, but rather people wanting a way to inexpensively build a great portfolio over time.

TDAmeritrade.com

I would recommend TD Ameritrade to those who already have a little experience in the market.  They charge $9.99 both to buy and sell shares during the trading day.  TD Ameritrade is helpful for setting up more complex trades involving options and spreads.  I’ve also noticed that the analysis, research, and charting tools are definitely more advanced than a company like Sharebuilder.  All in all, TD Ameritrade is great for people who trade frequently and require quick executions.

I’d only consider active trading after you’ve maxed out your 401k, IRA, and saved a good chunk of change for the month and STILL have some money to speculate with.  If that is you, I say go for it…and email me your stock tips!

No matter which company you sign up with, all allow you to easily link your checking or savings account to the brokerage.  Funding your account is simple and electronic transfers usually take 2-3 days.  In the event that you need your cash back, moving money back into your checking/savings account works just as easy.  Be sure to have 10-15 minutes of free time when setting up an account, as the application asks several questions.

This topic can be quite complicated and involved.  Feel free to comment if you have any questions on any of this.