Picking the right online brokerage comes down to your priorities. Some investors are willing to pay higher trade commissions for a state-of-the-art platform; others count costs above all else. Settling on the best option for you means weighing the following factors, which vary from broker to broker.
How to choose the best online broker:
- Pay attention to account minimums.
- Assess your investment selection – prioritize low commissions on the investments you’ll use most.
- Watch out for account fees.
- Consider your trading style and tech needs.
- Take advantage of promotions.
- Look at ratings and customer service.
Nerdwallet's brokerage tool
- Find the best broker for you
- Calculate costs based on trading style
- Open and fund your account
Pay attention to account minimums
How much you have to invest may slim down your choices. Initial deposit requirements at online brokerages skew toward $1,000 or more.
This is by design, for a few reasons. One, it’s simply hard for brokerage firms to make money off small accounts. Many mutual funds also require similar minimum investments, which means even if you’re able to open a brokerage account with a small amount of money, it could be a struggle to actually invest it if mutual funds are what you’re after.
Also, the less money you have to invest, the harder it is to achieve proper diversification. Or, to modify the old saying, if you have only one egg, you can put it only in one basket. (It’s not impossible, however. Here’s how to invest $500 and how to invest $1,000.)
If other must-haves on your list point to a broker with a higher minimum balance requirement, you could build up a pot of money in a plain old savings account, then transfer it over when you have enough.
Prioritize low commissions on the investments you’ll use most
Commonly, online brokers will offer the following investments:
- Individual stocks.
- Mutual funds.
- Exchange-traded funds.
The investments offered by the broker will dictate two things: whether your investment needs will be satisfied, and how much you’ll pay in commissions.
Pay careful attention to the commissions associated with your preferred investments:
- Individual stocks: You’ll typically pay a per-trade commission of $5 to $10. Some brokerages, such as Interactive Brokers and TradeStation, also offer per-share pricing. Read more about how to buy stocks.
- Options: Options trades often incur the stock trade commission plus a per-contract fee, which usually runs $0.15 to $1.50. Some brokers charge only a commission or only a contract fee.
- Mutual funds: Some brokers charge a fee to purchase mutual funds and index funds (a passively managed mutual fund that tracks an index, like the S&P 500). You can limit mutual fund transaction costs or avoid them completely by selecting a broker that offers no-transaction-fee mutual funds. (Mutual funds also carry internal fees called expense ratios. These are charged not by the broker, but by the fund itself. You can keep these costs down by investing in index funds or ETFs, which tend to have lower expense ratios than mutual funds.)
- ETFs: A type of index fund, exchange-traded funds trade like a stock and are purchased for a share price. ETFs have lower expense ratios, as noted above, but are often subject to the broker’s stock commission. However, many brokers also offer a list of commission-free ETFs. If you plan to invest in ETFs, you should look for one of these brokers.
- 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.
You’ll note that brokers that offer the lowest prices on stock trades often don’t offer any commission-free ETFs, and vice versa. That’s why knowing which investments you plan to use is a key part of determining the most cost-effective broker.
Watch out for account fees
You may not be able to avoid account fees completely, but you can certainly minimize them. Most brokers will charge a fee for transferring out funds or closing your account. If you’re transferring to another broker, that new company may offer to reimburse your transfer fees, at least up to a limit.
Most other fees can be sidestepped by simply choosing a broker that doesn’t charge them, or by opting out of services that cost extra. Common fees to watch out for are:
- Annual fees.
- Inactivity fees.
- Extra charges for broker-assisted trades.
- Trading platform fees.
- Extra charges for research and data.
- Paper statement fees.
Consider your trading style and tech needs
If you’re a beginner investor, you may not plan to trade frequently. In that case, you should avoid brokers that charge an inactivity fee if you don’t meet a minimum number of trades per month, quarter or year. Look for brokers that offer the investments you want at the most reasonable price. You probably won’t need extras, like an advanced trading platform. (Learn more about investing in stocks).
But you may want an education and a little hand-holding. This could include videos and tutorials on the broker’s website, or in-person seminars at branches. Many brokers offer these services free to account holders.
Active traders, on the other hand, will want to look for a brokerage that supports that kind of frequency. That includes weighing a broker’s trading platforms, analysis tools, research and data offerings in addition to commissions — including discounts for high-volume traders — and fees.
Plenty of high-quality online brokers offer access to trading platforms, tools and research for free, so beware of brokers that nickel and dime each feature; those costs can add up quickly. That said, you might get your money’s worth from a broker that charges higher-than-average commissions but offers an advanced, high-quality trading platform, like TD Ameritrade or Charles Schwab.
Take advantage of promotions
Online brokers, like many companies, frequently entice new customers with deals, offering a number of commission-free trades or a cash bonus on certain deposit amounts. It isn’t wise to choose a broker solely on its promotional offer — a high commission over the long term could easily wipe out any initial bonus or savings — but if you’re stuck between two options, a promotion may sway you one way or the other.
NerdWallet’s online broker ratings
If all if this has left you feeling a bit dizzy, know that we’ve done a lot of this work for you. NerdWallet’s comprehensive broker rating system is objective and based on the factors that matter most to consumers: commissions, fees, account minimums, customer service — essentially, all of what’s outlined above. (Here are NerdWallet’s editorial guidelines.)
We’ve done extensive research into the top brokers, selecting the very best for each type of investor:
- The best online brokers for stock trading.
- The best online brokers for ETF investors.
- The best online brokers for beginners.
- The best online brokers for options trading.
- The best online brokers for free stock trading.
This post was updated. It was originally published Sept. 19, 2014.
Image via iStock.