How to Trade Online: Your Guide to Brokerage Accounts

Investing

What is a brokerage account? Why do I need one?
If you want to invest your money in stocks, ETFs, bonds, futures, mutual funds, or currency, then you need a brokerage account. You can’t trade any of these through a normal checking account. Different brokerages vary in terms of the investment vehicles available and the fees associated with their accounts. To find a brokerage account, try using our Brokerage Comparison Tool.

Why should I care about paying a few dollars more to make a trade? I don’t trade very frequently.
A few dollars can easily add up to a few thousand. For example, let’s assume that you make 5 trades per month of 50 shares per trade. At TradeKing, you would pay $4.95 per trade, while you would pay $9.99 at E-trade. Over the course of a year, you would end up spending $59.40 at TradeKing or $119.88 at E-trade. That’s a difference of $60.48.

Why do broker-assisted trades cost so much?
Broker-assisted trades cost a lot because brokerages are trying to discourage retail investors from placing their order offline. Just like all other companies, brokerages aim to keep their costs low so that their profits will be high.

I don’t have much experience with investing. What features should I choose for my brokerage account?
This depends entirely on how you use the account. However, unless you’re intending on becoming an active trader, you probably won’t have any need for analysis software or streaming data.

  • If you just want an account to place trades in, your first priority should be price.
  • If you would like some assistance getting started with investing, then you should get an account with good service. You’ll want to evaluate the cost of research reports (to help you understand the market), broker-assisted trades, and 24/7 customer service. In addition, you may want to look for a brokerage that provides physical branches.

Terms to Know

Beginner

Real-Time Trades – Trades executed when requested as opposed to being held with other orders by the brokerage and executed during a designated trading window. As with automated trading, brokerages may offer this option at a cheaper rate, but you have less control as an investor.

Cost Per Stock Trade – This value is typically based on a fixed price per trade, but for some brokerages is priced based on the size of the trade (number of shares or principal value).

Minimum Initial Balance – This value changes based on whether or not the user has indicated that they trade on margin. Most brokers require a higher minimum balance in order to open a margin account.

Research Reports – Research reports can be very helpful to investors that would like detailed information on the market, or specific companies, but lack the time to investigate the numbers.

Bonds – By purchasing a bond, you are essentially giving a loan to the originator of the bond. As the bond’s owner, you receive interest on the loan, which is why bonds are considered to be under the category of Fixed Income. To learn more about the different types of bonds, please refer to this article.

Mutual Funds – Mutual funds provide investors with exposure to a diversified group of assets. In order to learn more about the many types mutual funds, please refer to this article.

ETFs– Exchange-Traded Funds offer exposure to a group of assets (like a mutual fund), but are traded on an exchange (like a stock). Some brokerages provide access to commission-free ETFs, which is helpful to people that trade them frequently.

Intermediate

Real-Time Data – Some brokerages will provide streaming data for free, but many will charge you an extra fee for this service, or simply not have it available. The standard delay for data is approximately 10 minutes. For most investors, this delay will have relatively little impact on their ability to trade.

Day Traders– Traders who execute a high volume of trades in a short period are legally recognized as Pattern Day Traders with special account requirements.  Please refer to this article in order to determine whether or not you qualify as a pattern day trader.

Penny Stocks – Any stocks with share prices under $1 are considered to be penny stocks, but individual brokerages may have their own qualifications. You should be aware of these qualifications if you trade penny stocks because many brokerages will charge additional fees and commissions for penny stock trades. To learn more about trading penny stocks, please refer to this article.

Advanced

Options – Options provide investors the ability to sell or purchase stock at a predetermined price within a specified period of time. To learn more about options trading, check out this article.

Margin – Margin loans allow investors to borrow money from the brokerage to fund investments. This strategy increases risk and is not employed by most retail investors. The interest rate charged by the brokerage is called the Margin Rate, and can vary significantly between brokerages.

Futures Trading – A futures contract is an agreement to buy or sell a fixed amount of stock at a certain price on a specified date in the future. To learn more about futures trading, please refer to this article.

Currency Trading – Currency trading is speculating on the relative performance of different economies; also known as Foreign Exchange, Forex, or FX trading.

Analysis Software – Almost every brokerage will provide the ability to compare the past performance of stocks over a fixed period of time. Analysis software can provide a much more in-depth view of the market or specific industries.  The exact capabilities of this software vary according to the brokerage providing it (for example, a brokerage that is heavily focused on options will provide somewhat better analysis tools for options traders).

Open an Account

Though each firm has different requirements, in order to open a brokerage account you’ll generally need: a U.S. address, your social security number, your date of birth, and an employer name and address. Once you set up the account, you’ll have to make an initial deposit; for some brokers the minimum initial deposit can range up to $10,000, so make sure to check before signing up.

It can be hard choosing a broker when you see so many advertisements, but here are NerdWallet’s recommendations for best overall brokers in terms of value:

TD Ameritrade is great for beginners because they provide top tier research reports for a reasonable price and have a relatively low minimum initial deposit ($500). The commission per trade is $9.99, which is higher than some of the deep discount firms, but most investors make less than two trades per month on average. TD Ameritrade is also the second largest online broker in the U.S. with over 5.8 million accounts, which is due in large part to their focus on customer needs.

TradeKing is a great choice for people looking to learn about trading and how to invest in various types of securities. TradeKing offers access to stocks, options, bonds, mutual funds, and forex. There’s no account minimum, you get free access to realtime quotes, and their $4.95 commission for equity trades is quite low. The downside is that TradeKing provides less tailored services than you’ll find at TD Ameritrade. For beginner investors that want to speak with representatives, TD Ameritrade will probably be the better choice. TradeKing is set up with lots of online education to help the do-it-yourself crowd get started trading quickly.