Tips to choose the best stockbroker
There has never been a better time to be an investor. Competition among online brokers is brutal, which means costs are coming down and services are being ramped up. But, with so much demand for online brokers, people are seeing more new firms enter the space, hoping to capitalize on the surge in retail investors. That can make it particularly hard for investors to find a broker that is the right fit for them.
There are a lot of factors to consider when choosing stockbrokers. Some investors are eager to pay higher trade commissions for a state-of-the-art platform; others count costs above all else. Some may want to stick with the biggest financial institutions with heavy name recognition; others may be more interested in sifting through the smaller brokers to find the ideal fit for them.
But no matter which stockbroker you choose in the end, the search usually begins in the same place: knowing your investment goals.
Joseph Scott Audia suggests that before you can begin sifting through stockbrokers, answer a few questions about your investing objectives. If you are planning to invest in a few individual stocks or if you are looking for a long-term retirement fund. Once you know the types of investments you are interested in, you can start evaluating stockbrokers based on a few factors, including:
Stockbrokers generally offer a similar menu of investment options: individual stocks, options, exchange-traded funds, mutual funds, and bonds. Some will also offer access to futures trading and foreign currency exchange markets. The investments offered by the broker will dictate two things: whether your investment requirements will be satisfied and how much you will pay in commissions. Pay careful attention to the commissions associated with your preferred investments:
- Mutual funds: Some brokers charge a fee to purchase mutual funds. You can limit mutual fund transaction costs or avoid them completely by selecting a broker that offers no-transaction-fee mutual funds.
- Options: Options trades often incur the stock trade commission, plus a per-contract fee, which usually runs between 15 cents and $1.50.
- Individual stocks: Some brokers still charge a commission to buy and sell stocks, either per trade or per share. But the vast majority of online brokers now charge no commission.
- Bonds: You can purchase bond mutual funds and ETFs at no charge by using no-transaction-fee mutual funds and commission-free ETFs. Brokers may charge a fee to purchase individual bonds, with a minimum and maximum charge.
There is a wide range of brokers out there. Some have been around for decades, while others are comparatively new to the scene. That does not mean these newcomers are untrustworthy if they are handling trades for other people.
Joseph Scott Audia advises that when you place a trade with a stockbroker, that stockbroker may send the trade over to a third-party market maker — basically a large financial institution or bank — that actually conducts the trade, connecting buyers and sellers. Market makers earn their money by buying a security from a seller, then turning around and selling it to another buyer for a bit more, often for a difference of just pennies. But when done on a vast scale, those pennies can add up to key revenue for the market maker.
It is in a market maker’s best interest for brokers to send them as several trades as possible, and they may be eager to pay stockbrokers to send trades their way to accomplish this. And if the broker accepts those payments and routes trades to the paying market maker, the broker is said to accept payment for order flow.