The nine main factors to consider

Brokers differ from one another in nine main ways. If you’re aware of these things and understand what you’re looking for, you can quickly eliminate brokers that don’t fit your needs. The factors to consider are as follows:

• Commissions: Perhaps the most important consideration for many investors when evaluating brokers is the price charged for executing trades, known as the commission. I discuss fees at length later in the chapter. There’s good news here. Commissions charged by online brokers have been steadily falling since the 1990s, with most taking even lower dive during yet another price war that erupted in 2017. Also, most brokers now offer flat-rate commissions, meaning that all people pay the same commission no matter how many times they buy and sell or how many shares they trade. Some brokers have even started offering free commissions on certain trades. Roughly a third of self-directed investors said they’re paying less than $5 a trade, according to a 2018 analysis by rating service J.D. Power.
• Availability of advice: One way brokers separate themselves is whether or not they give you any help picking investments. On one end of the spectrum are the full-service traditional brokers that are all about giving you personalized attention. Not only can they pick stocks for you, but they’ll also pour you coffee and serve you donuts when you visit them in their fancy offices. If you’re not interested in paying for such perks, the self-service brokers are happy to oblige. Self-service brokers give you the tools you need, and then you’re pretty much on your own. A few brokers fit somewhere between full service and self-service. J.D. Power found investor satisfaction was higher when brokers proactively reached out to offer help or guidance at least once a year.
• Access to an office: Some brokers exist only online. It’s up to you to have your own computer and Internet connection. But others have branch offices in certain cities and allow customers to stop in, do some trading, and sometimes take classes and fraternize with other investors or meet with advisors. You may not think that having access to a branch office will be important to you; after all, you’re an online investor. But some find comfort in a bricks-and-mortar location.
• Other banking services: A brokerage account doesn’t have to be a financial island. Some brokerage firms let you move money from your trading account into other types of accounts, such as checking accounts. Some also provide ATM cards or credit cards.
• Speed of execution: When you click the Buy or Sell button on the website, the trade isn’t done. Your order snakes its way from your computer to other traders’ computers on Wall Street, where it is filled. Some brokerages have spent a great deal of effort giving you the fastest path to other traders. That’s generally beneficial because it means that you get a price that reflects the true value of the stock you’re buying or selling. Depending on your strategy, you might not want your orders piling up in a bin, waiting to get filled. Speed of execution is tracked by broker-rating services, discussed later in this chapter, in the section “Finding Out What Reviewers Think.”
• Customer service: Do you have a question about your account or about making a trade? When you do, you’ll need to reach the broker and ask it. The levels of service vary wildly. Some brokers have customer service reps available at your beck and call either in offices or on the phone. Others let you email a question and wait for an answer.
• Site reliability: No one wants to be in the position of finding a promising investment only to discover that his or her online brokerage is down for repair. Some brokerages have focused on limiting system downtime, which might be important to you if you trade many times a day. Again, this is something brokerage-rating services measure.
• Access to advanced stock-buying tools: Some brokerage sites are pretty bare-bones because they assume that the investors already have the software and tools they need. This is dramatically changing, however, as many third-party investing websites are vanishing, scaling back, or starting to charge for their services. Now, investors are increasingly looking to their brokerages to provide comprehensive tools that can track tax liabilities, help them go prospecting for stocks, or monitor market movements or breaking news.
• Ease of use: Online brokers geared for people new to online investing or who plan to trade infrequently are minimalists and have as few buttons as possible. They’re the Zen of trading. But those aimed for hyperactive traders who click Buy and Sell so many times they have calluses on their fingers tend to give investors dozens of options allowing them to do some advanced stuff. Some sites targeting advanced traders provide trading tools aimed at helping investors flip stocks or other options quickly and at set prices. But that might be overwhelming if you just want to buy 100 shares of General Electric stock every couple of months.

Gotchas to watch out for

Brokerage firms often have confusing commission structures to fool you into thinking you’ll pay less than you ultimately do. Make sure that you check to see whether the firm charges extra for certain types of orders, such as limit orders (I discuss limit orders in Chapter 5), large orders, or mutual funds. Some brokers zing you with fees or inflate commissions if you don’t keep a balance of a certain size. Some brokers also charge you for switching to another broker. Always check before signing up for covert fees. The “Avoiding Hidden Fees” section, later in the chapter, can help you spot things to watch out for.

Paying the minimum with a deep discounter

The deep discounters are the Walmarts and Home Depots of the brokerage world. When you sign up for a deep discounter, you are on your own. But if you know what you’re doing, that’s a good thing because you don’t have to worry about getting pestered by a salesperson trying to pitch stocks you have no interest in. And you’ll get all the basics that you truly need, such as year-end tax statements, access to stock quotes and research, and the ability to buy and sell stocks and other investments. But the real beauty of these brokers is their sweet, low price: Because they don’t offer niceties, they can have the lowest commissions, usually $5 a trade or less. Leaders include the following:

• FolioInvesting offers a variety of pricing plans so that investors can choose which one works best. FolioInvesting’s Basic plan lets you trade stocks for a low price of $4 as long as you’re okay if the trades aren’t executed right away, but instead, during two “windows” during the day. If you’d like your trades to go through right away, you’ll be charged $10. You also pay a $15 maintenance fee per quarter if you place less than three trades in the quarter. If you pay a $290-a-year subscription fee, though, you get free delayed trades and a discounted rate of $3 to have trades go through right away.
• Robinhood offers the ultimate lure: Free commissions. It’s different than other brokerages in that it is entirely focused on mobile devices. Instead of providing a website for investors to log into and place trades, Robinhood focuses on apps for smartphones and tablets. You won’t find the rich data services available on the websites of other brokers — but you won’t pay for them, either.
• SogoTrade’s $4.88-a-trade is appealing not just for the low price. If you plan to be a serious trader, SogoTrade lets you download software to your computer — software similar to that provided by more expensive online brokers — which helps you track the market’s daily movements. You must open an account with at least $500, but you do not need to maintain a minimum balance going forward. And the commission drops to $3 if you trade 150 times or more a quarter.

• Ally Invest aims to give investors a few more bank-like niceties than other deep discounters, such as the ability to store cash balances in a high-yield savings account. Ally Invest, shown in Figure 4-1, also offers access to some company news and research reports, and a straightforward flat-fee commission of $4.95. The brokerage is a capable complement to what was primarily an online bank but is most appealing to existing bank customers. This broker isn’t for the advanced trader.

  No minimum account balance is required, but you’ll be charged a $50-a-year fee if you have less than $2,500 in your account and don’t trade at least once a year. You can view some of the tools Ally Invest offers to options investors in Figure 4-1.

Table 4-1 sums up the main differences among the deep discounters.

Beginning investors always ask me how much money they need to begin and where they can get started investing online. You can start with next to nothing with brokers that have no minimum deposit requirements, which includes most of the deep discounters. If you’re the kind of person who can’t seem to save money until you’ve sent your cash off to a bank or brokerage, these are great places to start.

Get more with a discounter

If the thought of being completely on your own makes you nervous but you’re not willing to give up low-cost commissions, the discount brokers sit in the sweet spot for you. These brokers suit most investors ranging from beginners to the more advanced because they generally offer some advice (if you ask for it), and many have offices in most major cities.

Even if you’re not looking for advice, the discounters are still appealing because they load their websites with advanced tools to help do-it-yourself investors of all levels. Some provide access to advanced trading tools, real-time stock quotes, or special computer programs that let you enter trades just as fast as the traders on Wall Street. Top-notch apps that let you check your portfolio and place trades on the go are also part of the deal. These extras sometimes come with slightly higher commissions, but the difference isn’t all that significant anymore compared with the deep discounters, and it might not be a deal-breaker for you. Price wars have yanked commissions from the discounters down to between $4 and $10. Most discounters also offer price breaks if you’re a hyperactive trader. Most of these brokers also offer services where you can invest in a premade mix of diversified investments, rather than picking your own stocks or funds. The names to know here are

• Bank of America might not be what you think of as a stockbroker, but it’s one of the large banks aggressively boosting its brokerage services. Traditionally, banks have targeted the well-heeled with personal bankers who pick out investments like personal shoppers pick out ties for rich executives. But Bank of America's Merrill Edge unit has added self-service brokerage fees with commissions starting at $6.95. And you can get 30 free trades a month if you keep at least $20,000 with the bank in a deposit account, such as a Bank of America savings account. As your account grows, you have access to the wealth management services offered by the bank. Bank of America makes its connection with Merrill Lynch clear on its website, as shown in Figure 4-2.
• Charles Schwab tries to be the Toyota Camry of brokers: not flashy or exotic in any one area but practical and pleasing to the bulk of investors. Schwab lowered commission to $4.95 in 2017, keeping it competitive among the other discounters. Schwab’s commissions are still among the cheapest, and for that price, the broker adds services that might be valuable, whether you’re looking for help or want to be left to your own devices. For instance, you can buy hundreds of exchange-traded funds for no commission. Do-it-yourselfers might like Schwab’s Equity Ratings, a computerized system that evaluates stocks and assigns them letter-grade scores from A to F. It also provides access to Wall Street research and a full suite of banking services, including high interest rates paid on cash sitting in your account. But if you decide later you need more help, Schwab offers mutual funds designed to fit specific needs in addition to making consultants available to give you personalized advice. If you’re not going to use all these extra services, though, the higher commission might not be worth it. You can see the site in Figure 4-3.
• E*Trade has a reputation as being an innovator in the industry and seems to be always looking for ways to separate itself from others. E*Trade has long targeted active traders with computer software such as Power E*Trade, which is software that lets you find stocks and other investments that meet your criteria or test how trading strategies would have worked in the past. But E*Trade has things for beginners, too, such as access to stock research from several providers and the capability to shift cash to a checking or high-yield savings account. There’s an advanced smartphone app and a more basic one, too. The commission is typically $6.95 but can be lower based on your account balance and how often you trade.
• Fidelity consistently gets good marks for making its website easy to navigate and getting trades through quickly. Fidelity has also been a leader in adding functions outside of just plain-old U.S. stock trading, including an advanced online system to buy bonds, invest in initial public offerings, and trade stocks outside the United States. It’s also well designed and a good value. For years, Fidelity was a premium-priced online brokerage, but after slashing its commissions to $4.95, it’s competitive if not on the low end. In addition, Fidelity is offering commission-free purchases on select ETFs from Fidelity and also iShares, which is one of the largest providers of these investments.
• Interactive Brokers is looking for the pros — or people who want to be. This isn’t the brokerage for casual investors. You’ll find advanced trading tools and software designed for sophisticated and rapid-fire trading strategies. The company maintains two pricing structures, both designed to reward frequent traders or those with relatively large balances of $100,000. If you’re serious about trading, this is a broker worth considering.

• Motif Investing is best for investors who want to pick trends or themes, not necessarily individual stocks. Customers can choose from dozens of premade investing Motif Thematic Portfolios, which are broad ideas for investment, such as companies working on biotechnology developments, called Biotech Breakthroughs, or companies that get most of their revenue from the U.S., called All American. Investors can buy the Motif Thematic Portfolios, and then Motif Investing will invest the money in a group of up to 30 stocks fitting the theme.

  This brokerage is convenient for investors who don't want to choose individual stocks but aren't happy with the current selection of mutual funds or ETFs. Motif Investing charges a $9.95 commission to buy or sell a Motif Thematic Portfolio. You can also buy and sell individual stocks for $4.95 per trade. The company has been adding additional features, such as the ability to invest in themes that reflect your personal values and also new stock sold by companies for investors for the first time.

• TD Ameritrade’s earliest customers were active traders looking for low commissions. But the brokerage’s low-cost roots are eroding, as its $6.95-per-trade commission is now more than what most of its major rivals charge. But TD Ameritrade tries to make up for its higher commission by offering a variety of high-tech digital tools and services that might save you money. Investors who trade frequently during the day also like TD Ameritrade’s bonus PC software trading tools, such as thinkorswim, which let you see second-by-second stock price movements or test trading strategies and analyze how they would have done. The broker also offers solid mobile apps to keep tabs on your portfolio and to make trades.

  TD Ameritrade is also a leader in offering consumers free trading in ETFs. Customers can choose from hundreds of ETFs from several leading providers, including iShares and State Street, and pay no commission as long as they are held more than 30 days. Keep in mind that Vanguard’s uber-popular ETFs are not included. If you want to buy those, you might look elsewhere, including at Vanguard. (See Figure 4-4.)

• Vanguard wins fans for its speed, the quality of customer service, and availability to help in navigating the site and making investment decisions. The company, best known as a mutual fund provider, is taking brokerage more seriously. Vanguard’s commission structure, though, is a little more complex than at other brokers. For stocks, the first 25 trades you make in a year are a competitive $7 if you have less than $50,000 in your account. After you trade 25 times, trades jump to $20. If you keep more than $50,000 in your account but less than $500,000, you can get unlimited $7 trades. If you have more than $500,000 in your account, trades are discounted to $2, and trades are free if you have more than a million bucks in your account.

  Here’s one key selling point for Vanguard: It provides free unlimited trading to all investors in its own family of well-regarded ETFs. Remember, Vanguard’s stock brokerage offering is separate from the account that lets you buy and sell Vanguard mutual funds, which I cover later. Vanguard is also top-notch in putting any uninvested cash in your brokerage account automatically in a safe, interest-bearing investment. This is a huge advantage, as you’ll read about later in this chapter. Some investors may be charged a $20 annual account service fee unless they sign up to get account statements only online.

• Wells Fargo is another bank that follows the model of using brokerage services to tempt customers to put more money in its hands. Wells Fargo’s self-service stock commissions start at $8.95. But if you keep at least $25,000 in your deposit accounts, you can cut that to $2.95 without paying the monthly service charge of $30. Wells Fargo also gives you 100 trades a year with no monthly service fee if you keep $50,000 with the bank and its brokerage. But falling short of the $25,000 deposit balance or $50,000 total can be costly, resulting in a $30 a month fee. If you’re a Wells Fargo customer with a decent sized portfolio, it’s worth considering. The company’s mobile app is capable but not fancy. And its website provides helpful planning information, especially pertaining to taxes and dividends.

Check out Table 4-2 for an overview of what the different discounters have to offer.

Full-service traditional

Because you’re reading Online Investing For Dummies, chances are good that you’re a do-it-yourself kind of investor or one looking for minimal handholding. But maybe after reading the preceding descriptions, you’re looking for even more help. That’s when you might consider a full-service traditional broker.

Full-service broker-dealers pride themselves on being part of your team of people whom you call on routinely for advice, such as your real estate agent, housekeeper, and mechanic. The top full-service traditional brokerages are the Wall Street firms you’ve probably heard of, such as J.P. Morgan Securities (www.jpmorgansecurities.com), Bank of America’s Merrill Lynch (shown in Figure 4-5), Morgan Stanley (www.morganstanleyclientserv.com), Edward Jones (www.edwardjones.com/), Goldman Sachs (www.goldmansachs.com/), and UBS (www.ubs.com/us/en.html). Merrill Lynch, through Bank of America, competes with the discounters. But Merrill Lynch (www.ml.com/) also provides full-service brokerage services as part of its wealth management offering, geared for wealthy investors.

And by now, most full-service traditional brokers can legitimately call themselves online brokerages because they have websites that let you view your accounts. Services that these firms provide include

• Constant stock recommendations: Most big Wall Street firms have well-known strategists and analysts who think big thoughts and come up with stock tips. The brokers then spread those tips to you.
• Access to initial public offerings: When companies go public, they first sell their shares to large Wall Street investment banks. Those shares, especially if the initial public offering (IPO) is expected to be popular, are often a sought-after commodity because they have the chance to rise in value the first day. If you’re an active customer with these firms’ brokerage divisions, you might get a shot at buying these shares at the IPO price. (You find more on IPOs in Bonus Chapter 2 on the website associated with this book.)
• Availability of other financial services: If you’re a customer with a full-service traditional brokerage, you might get extra financial services, such as help with your taxes or estate planning.

But before you get too excited about the extra services that traditional full-service brokers may provide, you also have downsides to consider, such as

• Relatively high cost: Wall Street firms have to pay somehow for those fancy offices you’re enjoying. The fees tend to be higher, and you might pay a lofty commission for each trade or pay a percentage of your assets.
• Uneven treatment: Remember that it’s unlikely you’ll end up being Goldman Sachs’s best customer, so don’t expect to get the real goods. For instance, when shares of the next truly promising IPO are doled out, if you’re not a top customer or famous, you probably won’t get shares anyway. (Fees and rates can vary, too, which is why I didn’t even bother coming up with a table comparing fee structures for the full-service traditional brokerage crowd.)
• Potential for conflicts: Because brokers are often paid by commission, they might have an incentive to urge you to trade more frequently than you might like.

There are broker-dealers and then there are investment advisors. They both offer financial advice and call themselves advisors, but they are registered with regulators differently and have unique standards of conduct. Broker-dealers must sell you investments that are suitable. They are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Investment advisors, which are typically independent and not associated with giant Wall Street firm, are regulated by the SEC. They must act as fiduciaries, putting client’s interests first. Typically investment advisors offer their own websites or use specially gated areas for clients at Schwab, Fidelity, or TD Ameritrade.

Be skeptical if a friend or family member recommends a broker to you. Many brokerage firms give customers bounties of $50 or more or dozens of free trades if someone they refer signs up. I’m not telling you that you can’t trust your friends. Just know that people who recommend their broker might have a motive other than telling you which broker is best for you.

Stocks: Direct investments

Direct investments are where you buy the stock straight from the company. Many large companies, such as Coca-Cola, Procter & Gamble (P&G), and Walt Disney, allow you to buy and sell your stock with them and avoid a broker. Many direct investment programs are connected with dividend reinvestment plans (DRIPs), where the companies let you use dividend payments to buy, or reinvest, additional shares.

If you’re interested in going with a direct investment program, you can visit the investor-relations section of the company’s website to see whether it offers one. Many companies allow you to participate in direct investment programs through their transfer agent — a company with the responsibility of tracking ownership of shares.

Coca-Cola, for instance, has an elaborate shareholder investment program that lets you buy as little as $500 in stock — they’ll even reinvest the dividends. You can read about this program, offered through the transfer agent Computershare (shown in Figure 4-8), at www-us.computershare.com/Investor/#DirectStock/Index. EQ by Equiniti, at www.shareowneronline.com/UserManagement/WFIndex.aspx, is another provider of direct stock purchase plans for many companies.

The other way to find direct investment programs is through directory services, such as The Moneypaper’s Directinvesting.com (www.directinvesting.com/). The site provides a search function so that you can see whether a company you’re interested in sells shares directly to investors. Just enter the symbol of the company you’re interested in, and you can see whether the company offers a direct investment plan.

Here are the upsides to direct investing:

• Potential commission savings: The fees charged by direct investment programs can be lower than what some brokers charge. Coca-Cola, for instance, charges $3 if you pay for it using an electronic transfer from your bank, and $2 if you set up a recurring order to buy the stock.
• Dividend reinvestments: Dividends can often be reinvested for free. If you’re with a broker, you would often incur a commission to reinvest a dividend into the company stock.

As you might suspect, direct investing has some downsides:

• Not free for all transactions: Some companies even charge commissions that exceed what deep discount brokerages charge for certain services. For instance, Coca-Cola charges $25 if you want to sell the shares immediately. There may be loads of additional fees, including quarterly maintenance fees. Be sure to check the company’s website, usually in a document called a direct stock plan prospectus, and understand all the fees that are charged.
• Setup fees: Although opening an online brokerage account is usually free, some direct investment plans charge a fee to get started. Some plans also have minimum initial deposits. Coca-Cola, for instance, requires a $500 investment for a new account. Some charge setup fees.
• Limited universe: By using direct investment plans, you’re narrowing your universe of possible investments to the hundreds of the largely older, blue-chip companies that offer these programs. That means you miss out on younger or smaller companies.
• Administrative hassles: With direct investment plans, you need to manage all your separate accounts, which could be a pain if you have ten or more investments. You also won’t get access to any of the tax assistance or research the brokers provide.

Mutual funds: Straight from the mutual fund company

Mutual funds gather money from many investors and use the cash to invest in a basket of assets. When you buy a mutual fund, you’re joining a pool with other investors that own assets, rather than owning the assets yourself. You can read more about mutual funds in Chapter 10.

Nearly all brokers let you buy and sell mutual funds in addition to stocks and other investments. And sometimes trading in mutual funds can make sense, especially if it’s free. Most brokers have a list of transaction-free mutual funds you can buy and sell for no charge. Schwab, for instance, lets you buy and sell thousands of mutual funds that are part of its OneSource Select program at no cost (www.schwab.com/public/schwab/investing/accounts_products/investment/mutual_funds/no_load_mutual_funds).

However, if you’re not going to buy from the transaction-free lists, you’re wasting your money buying mutual funds this way. Schwab, for instance, charges $50 to buy a mutual fund not on its list (selling is free). Don’t let your broker’s commission schedule determine which mutual funds you buy.

One of the best things about mutual funds is that you can buy them with no transaction fee if you deal directly with the mutual fund company. This feature can be a tremendous advantage, especially if you’re making frequent and regular investments into a fund. After you figure out what fund you want to buy, log on to the mutual fund company’s website, open an account, and buy it. You’ll save yourself some cash.

When opening an account with a mutual fund company to buy a mutual fund, be sure to open a mutual fund account, not a brokerage account. Several mutual fund companies, including Vanguard and Fidelity, offer brokerage accounts in addition to mutual fund accounts, and the fees are completely different.

The checklist of what you need to know

The biggest button on most broker’s website is the Open an Account or Start Now button, so you won’t have trouble finding it. Typically, that’s all you need to click to launch the area of the website that can set up your account. (If you want to sign up through the mail, click a link to download the necessary forms.)

Typically, you need to know three things to complete the application:

• The kind of account you want to create: This is usually a cash account or margin account. I cover margin accounts in more detail in Chapter 5.
• The number of people associated with this account: Is this just for you or for you and a spouse? This determines whether you create an individual or joint account. You can review this in Chapter 3.
• The tax status of the account: Is this a taxable account or a tax-deferred account, such as an IRA or a fund for college? You can review the differences in Chapter 3.

If you're opening a retirement account, make sure the broker you're considering doesn't charge a monthly, quarterly, or annual maintenance fee. Most brokers waive maintenance fees if you’re opening an IRA account because they figure you’ll keep your money with them for quite some time. Many also waive the minimum deposits. For these reasons, if you’re just starting out with online investing, you might consider opening a retirement account first.

The checklist of what you need to have

You need these bits of info if you want to set up an account:

• Identification: You need ID such as a driver’s license or a government-issued ID card.
• Social Security number: If you’re creating a joint account, you’ll also need the Social Security number of the person you’re setting up the account with. This information is used for tax reporting.
• Bank statement of the financial institution from which you’ll transfer money: The statement contains the account and bank routing numbers you’ll need to instruct the broker to get your cash. Keep in mind that some brokers won’t let you open an account with electronically transferred money if you’re depositing less than $500. In those cases, you need to mail a check.
• Address of your employer: This information is necessary if you’re an officer, director, or large shareholder of a publicly traded company.

See, that wasn’t hard. And here’s the best part: Now that you’ve entered all your information and funded your account, you’re all set to start investing.