A price war has broken out among online brokerage firms in recent months. In an effort to lure investors, industry leaders such as Charles Schwab, Fidelity Investments, TD Ameritrade and E-Trade have slashed trading commissions.
The price war has driven the greatest decrease in trading costs in seven years, says Richard Repetto, an analyst at investment banking firm Sandler O’Neill and Partners. “It’s a good time for investors as the costs to trade decline and advancements in the online trading space make it cheaper and more efficient to invest,” Repetto says.
Price cuts at online brokerage firms
|Provider||Previous per-trade commission||Current per-trade commission*|
|E-Trade||$9.99||$6.95; $4.95 for frequent traders defined as 30+ trades per quarter|
Why would you want a brokerage account? If you want to buy and sell stocks, bonds and mutual funds, among other investment vehicles, you need one. But which one? As competition grows, so do your choices.
“Evaluate what type of investor you are, how often you trade and what services you want,” Repetto says. “It’s gotten so cheap now, and the range of choices has widened … some provide little cost to trade but little in the way of recommendations. If you want more advice services — not just call-center help — that is also a big consideration.”
Here are some key questions to ask when choosing a broker.
1. How much cash do you need to start?
Different brokers have different account minimums depending on the types of services you want. Some allow a $0 minimum to open a retirement account such as a traditional individual retirement account or a Roth IRA; others can require anywhere from $500 to $10,000 to begin trading. And some brokers will waive the initial deposit if you set up automatic monthly deposits.
A common rule of thumb: Don’t invest cash you’ll need in the next five years so your investments have the opportunity to grow and ride out market contractions.
2. What are the costs?
People shopping for their first brokerage may simply look for providers with the lowest trading fees. That could be a good strategy if you plan to make a lot of trades. But trading commissions are only part of the picture. Other costs may include annual fees, inactivity fees and additional charges for access to different trading platforms and research, so factor those into your evaluation as well.
3. What types of assets can you trade?
As an investor, what kind of assets do you want to buy? The ability to trade individual company stocks, exchange-traded funds and mutual funds is standard for most brokerage accounts, but the selection of funds can widely vary. If you plan to trade currency, futures or options contracts, check that the broker offers those products. Also, note whether the associated fees and account minimums differ from what you’d pay to trade equities.
4. How much help does the brokerage offer?
How much hand-holding will you need? If you’re a first-time investor, probably a lot. Some brokerages offer online or in-person consultations with financial advisors, which may be attractive to newbies. If you’re a DIY investor, the depth and usability of the brokerage’s research tools also will be a factor.
Select a broker whose educational tools and advice services match your investing comfort level.
5. Is the platform right for you?
Like test-driving a car, get behind the wheel of any brokerages you are considering and ask yourself: Do I like how this feels? One of the best ways to do this is through a broker’s demonstration account or virtual trading, also known as “paper trading.” Many brokers also have videos showing how the platform works, which are worth watching before you commit.
This is a bigger factor than you might think: An April 2016 survey by NerdWallet and E-Trade found that site usability and tools were a top reason traders said they’d switch platforms, behind fees and commissions.
If you get buyer’s remorse down the line — for example, you’re trading more than you anticipated or are paying for advisory services you aren’t using — you can always switch. You’ll want to watch for any broker-change fees from your current provider, but any promotional deals from your new broker could remove their sting. After all, if there’s one thing the price war has revealed, it’s that you have plenty of options.
Kevin Voigt is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @kevinvoigt.