About Online Brokers

There are some things you should know about online brokers before you sign up. Learn what you should watch for.
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Competition can help consumers save money, and that reality is clearly evident in the world of online brokerage firms. Ever since the mid-1990s, discount brokers have been competing online for customers by offering better trading commissions, fewer account fees and lower margin rates than traditional brokerage firms.

The advent of the discount brokers moving online has greatly empowered individual investors. Online brokers provide a computerized trading platform, replete with research tools, so that individual investors can trade their own stocks, bonds and mutual funds without paying for investment advice and extra fees for customer service.

The success of online brokerage companies is epitomized by the rise of E*Trade Financial Corporation from a small start-up to a company with revenue and assets in the billions of dollars. The major online players like E*Trade weathered the financial crisis of 2008-2009 and continue to offer highly competitive commission rates, with many of the same account features and services as their full-service brokerage firm counterparts.

Finding the best online broker for you

Which online broker is the best for you and your family? That depends. Are your trading with $10,000 or $500,000? Do you trade stocks, options, bonds or mutual funds? Is your account a retirement account, family savings or a day-trading account? As you can see, there is not a simple answer to the question of which broker is best — it takes a little work to narrow it down to the one that will best suit your needs.

The best way to find the right online broker is to anticipate the type and volume of trades you expect to execute in the account. Next, compare commissions rates and service fees for your anticipated dollar amounts and estimated account balance. Absolute rock-bottom commission rates may not always be the right answer, but drilling down to find out what you will pay for your trading activity at different online brokers will help you make an informed decision.

What about margin rates and the rate of return for funds sitting idle in money market accounts? Interest rates can vary from broker to broker, so take the time to compare.

You should also check the trading and research tools offered by the online brokers on your list. Are they satisfactory for the type of analysis you would like to undertake? Many online brokers let you set up free mock-trading accounts to test drive their platform. This may be a good idea because switching online brokers after you open an account can be time-consuming.

Remember, there is no overall best online broker. There is only an online broker that makes the most sense for you.

Online security: protecting your funds, identity and data

Online accounts with member-SIPC brokers are protected to a degree. The Securities Investor Protector Corporation (SIPC) is a non-profit, non-government corporation that is funded by its own members. The primary function of SIPC is to return funds and securities to investors when a broker fails. The SIPC also provides protection against unauthorized trading in a customer’s account.

SIPC coverage is limited to $500,000 per customer, but in reality, as long as your broker has segregated your funds from company assets, all your funds should be recoverable in the event of a failure. Even with SIPC insurance in place, investors need to ensure that they do not risk their funds or personal data to theft from hacking or illegal online access. An online due diligence checklist should include the following:

  • Check your online statements. The first defense to protect your data and your money is vigilance. Review your statement every month transaction-by-transaction for any anomalies.
  • Don’t share your password. Every online brokerage account is password-protected. Your password is stronger if it is alpha-numeric, without consisting of common nouns or personal identifiers. Unfortunately, this can make a strong password hard to memorize. You may even be tempted to store your password in your personal ledger or cell phone for the convenience factor. This is never a good idea. Don’t write or record your online brokerage password in any device or object that could be lost or stolen. It is safer to store passwords in encrypted files.
  • Stay within your firewall. Using your home computer with your personal firewall is much safer than logging-in to your account through an Internet connection for which you do not know or control the security settings. Using a WiFi connection outside your firewall can be especially dangerous, as your browsing information can be captured for nefarious purposes. Play it safe and stay within your protected firewall when logging into your online brokerage account.
  • Don’t go phishing. Every day millions of phishing emails go out disguised as legitimate communications from financial institutions. Don’t be fooled by an email that might look convincing but is actually an attempt to steal your password and account information. Always log-in to your online broker account via the home page URL of the broker and not by clicking an embedded email link.
  • Check out your online broker . Review websites can make it easy to compare different online brokers to find which one is best suited to your needs. Take the time to read reviews and descriptions of different online brokers before deciding to open an account. If you are considering an online broker that is not reviewed by a major financial site, check with your state’s regulatory authority to make sure they are licensed and in compliance.
About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).