3 Things to Consider When Choosing an Online Broker

Look at cost, service and tools.

Miranda Marquit

The Internet has been a great democratizing force in a number of ways. For "ordinary" people, the Internet has brought the ability to invest in a way not available 20 years ago. It's possible for just about anyone to open an account with an online broker and start investing. In many cases, you can start investing with as little as $25.

There are so many brokers to choose from, though. How can you choose the best broker for you? As you evaluate online brokers, here are three things to consider: 

1. Cost

The first item on most minds is cost. This makes sense, since high fees and commissions can erode your real returns. Online brokers usually charge a flat, per-transaction fee. There are brokers that charge as little as $2.95 per stock (or exchange-traded fund) transaction, and those that charge as much as $9.99 for each. Brokers also charge different fees for trading mutual funds, CDs, bonds and options. When trading ETFs and mutual funds, you also have to take into account the expense ratio.

An increasing number of brokerages are offering fee-free ETFs, which allow you to trade ETFs without the commission — although the expense ratio is still something to consider. Other brokers will let you trade select mutual funds free of charge as well (you still pay the expense ratio there, too).

Also, consider the possibility of account service fees, inactivity fees and other similar costs. It's possible to find brokers that don't charge these types of account fees, and those brokers can save you money. If you are a buy-and-hold investor, the absence of account service fees is especially important. Those involved in dollar cost averaging should consider brokers that offer a discount if you create an automatic investment plan.

HP Image — Investor using a tablet computer


2. Research and Education Tools

Beginning investors can learn a lot from research and educational tools provdied by brokers, and use them to make better decisions about how to invest thanks to a wide array of reports, tutorials and other information. There are online brokers that charge a little bit more, due to their in-depth research and education tools. Beginners who rely heavily on these tools might find it's worth it to pay an extra $2 per transaction to access these features.

On the other hand, some of the online brokers that offer much lower-cost trades might not offer the same research tools. Advanced traders and active traders might not care about the research and education tools, and instead prefer a stripped-down site with lower fees.

3. Customer Service

What happens if there is a hiccup with the trading platform and your order is messed up? What if you need help placing a trade? What if you have other questions? Good customer service can be important when you invest with an online broker. Is it easy to find customer service information? Look for a customer service number prominently listed on the site, or, even better, see if there is a live chat option.

The best customer service providers are those that offer different contact options, including phone, email and live chat. That way, you can resolve your issues in a way that is most convenient and comfortable for you. A good customer service reputation can go a long way when you are choosing an online broker. Also, make sure that the broker is reputable, and that it is a FINRA/SPIC member.

Ultimately, you need to decide which combination of factors is most important for you when choosing an online broker. Other considerations include web site design, number of available investment choices, and how easy the platform is to use. Think about what benefits and feature are most important to you, and vet your online broker based on those items.

Miranda Marquit is a freelance financial journalist. She writes about beginning investing, low cost index funds and dividend stocks for a variety of financial websites. Her own blog is Planting Money.