Best Online Brokers for Beginners
Investing involves a lot of things you can’t control.
So when you’re learning how to invest, it becomes all the more important to make the right choices about things that you can control.
Choosing the best trading platform is a good place for beginners to start. After all, you can’t control the markets, but you can improve your odds of earning a good investment return by choosing a brokerage account that’s not going to eat up your capital with fees.
Fees are an especially important issue for beginning investors. That’s because the smaller your account balance, the more fees and commissions tend to represent as a percentage of your money.
Fortunately, investing online has revolutionized the cost structure of investing – but not all online brokers are the same.
This article discusses some of the key factors beginning investors should look for when choosing a brokerage account. It also identifies several of the best investment accounts for new investors.
What Determines the Best Brokerage Accounts for Beginners?
IN THIS ARTICLE
If you are a beginning investor, what should you look for as you open a brokerage account?
Some needs depend on your personal preferences and the type of investor you are, but these three factors can be easily measured and should be important to every new investor:
- Account minimums
- Maintenance/inactivity fees
What is a Commission?
A commission is a fee you pay when making a trade in a brokerage account.
Commissions can be charged both when you buy and when you sell a stock. This makes it doubly important to compare commissions when choosing a broker, because you could face paying a commission twice for every investment you make.
However, the nature of commissions has evolved over the years.
How commissions have changed
Brokers used to charge a commission based on the number of shares you traded. Commission rates were quoted on the basis of cents per share – and this meant that the more shares you traded, the more commission you would pay.
Over the past decade or so, many brokers switched to flat-rate commissions. This meant that they had one dollar amount for commissions, regardless of the size of your trade.
This was a great deal for large investors, but not so much for smaller investors. A $5-per-trade commission may be barely noticeable if you are buying $100,000 worth of a stock, but it takes on greater significance if you are placing a $1,000 trade.
Fortunately for smaller investors, recent years have seen a price war among online brokers that has led to many charging no commissions on routine trades.
Commission-free stock trading doesn’t mean that brokers have started giving away something for nothing. They have several other ways to make money from their clients.
Still, since commissions are a cost that can now be eliminated, you should definitely look for a broker that offers free stock trades. Especially if you are a new investor starting out with a small account, this will help preserve your limited resources.
What are Account Minimums?
Many brokerage accounts require that you invest a minimum amount of money in order to open an account.
This can be a barrier to newer investors.
Even if you can afford to meet a brokerage firm’s minimum, you might prefer to start with a smaller account while you are still learning how to invest.
Nearly half of the brokers surveyed by MoneyRates had a minimum funding requirement. If you prefer to start small, look for a broker without an account minimum requirement.
What are Maintenance/Inactivity Fees?
In addition to commissions, some brokers charge a fee just for having an account. This is known as a maintenance fee.
In other cases, a broker might charge a fee if you haven’t reached a certain amount of trading activity. The idea is that if they can’t make money off of your trading, they need to make it up some other way.
Most of the brokerage firms MoneyRates surveyed have some form of maintenance or inactivity fee. These fees are especially tough on small investors.
A $10 fee would be a fairly small percentage of a $250,000 account, and in any case they are often waived for larger customers. However, if you have just a thousand dollars in your account, you can ill afford to be giving $10 away month after month.
Looking for an account with no maintenance or inactivity fee is a smart place for beginning investors to start.
What Is the Best Brokerage Account for Beginners?
With all of the above in mind, what are the best online brokerage accounts for beginners?
MoneyRates.com identified nine brokerage firms that are ideal for beginner investors. These accounts have no commissions, no monthly fees and no account minimums.
These nine rank as the best brokerage accounts for online brokers. They are listed alphabetically because they all ranked equally based on commissions, fees and minimums:
- Ally Invest
- Charles Schwab
- Interactive Brokers
- Merrill Edge
- TD Ameritrade
Other Features of Trading Platforms
MoneyRates focused on commissions, fees and account minimums for two reasons:
- These are all especially important factors for new investors starting out with smaller accounts
- All three factors can be objectively measured and ranked
However, there are also more subjective things you might consider when choosing a broker.
Trading platforms have many other features. How important these are to you depends on how you plan to invest.
It’s important to think ahead about how you plan to use the account before you start looking at brokerage accounts. This will help you recognize the most important things to look for when checking out brokers.
Other things you might consider:
- Availability of tutorials on investing
- Access to investment data and analysis
- Trade simulators and other automated tools
- Trading platform clarity and ease of use
- Range of product offerings
- Fees for specialized types of trading and other activities
So the best online stock broker for beginners might not be the same firm for all investors. However, if you start by looking at firms with no commissions, no minimums and no fees, you can narrow down your search and focus on some of the more subjective factors.
While you can always change brokers if you choose one that turns out not to suit you, there can be a cost to transferring securities or liquidating investments. Besides, wouldn’t you rather spend your time looking at investment ideas rather than brokerage firm paperwork?
So, choose carefully. Start with the measurable factors, and then finalize your decision based on additional factors that matter most to you.
How Do Beginners Buy Stocks?
Trading online involves being able to give very exact details on each trade. Here are some of the basics you must know about how to buy stocks online:
This is a short symbol (usually a few letters, but sometimes it might include numbers as well) used to identify specific stocks. You will have to enter a ticker when you place a trade.
The ticker is important because sometimes different companies can have very similar names. Using the right ticker ensures you are getting the stock you intended to buy.
Number of shares
Since prices are moving constantly, you generally trade stocks according to the number of shares you want to buy rather than the dollar amount.
However, if you have a specific dollar amount in mind that you want to invest in a stock, you can divide that amount by the stock’s current price. This gives you roughly the number of shares you would need to buy to get that much of the stock.
Type of transaction
It may sound obvious, but it’s a mistake people sometimes make: be sure you provide the right instruction for whether you intend to buy or sell a stock.
Stock prices are generally quoted based on the most recently completed trade, but prices can change quickly. There may also be a difference between the price buyers are bidding and that sellers are asking.
So, be clear not just on what you want to buy, but how much you are willing to pay for it.
If you just want to get a stock quickly regardless of price, you can enter what is called a market order. This is an order to buy or sell a stock at whatever the current market price is.
A limit order is something you would place if you only want to trade a stock within a certain price limit. So, a limit order of $50 would mean the broker would execute a buy only if you could get the stock for $50 or less, and would execute a sale only if you could get at least $50 for the stock.
Because of thin trading volume or a stock’s trading outside of your limit order, a trade you place may not be completed right away.
If you want to make sure you don’t lose track of orders you have out there that could still be executed, a day order is a good idea. It means that your trade will be canceled if it cannot be made that day.
Unlike a day order, a good-till-canceled order remains in effect until market conditions allow it to be placed, regardless of how long that takes.
Learning How to Invest
The above basics can help you get started placing trades, but there is much more to learning how to invest.
Read all you can about how markets behave and about the companies and industries in which you invest.
Ultimately, no matter how much you study, experience is the best teacher. That’s why it is best to start by trading relatively small amounts.
All investors make mistakes. The best investors know how to limit the damage from their mistakes and how to learn from them.
Take the next step
When it comes to making progress toward your financial goals, wasting time and money is something to avoid. If you’d like to see some investment products and services – or just find someone who can work with you one on one to help design your overall investment strategy – select a financial goal below for a curated list of investment options and specialists ready to help.