The Best Way to Buy Stocks

According to Barron's, I'm not using the right broker. But regardless, you won't be seeing me make any major moves with my portfolio.

Recently, the financial publication came out with its annual review of online brokers. Topping its list was thinkorswim, the broker acquired last year by TD Ameritrade (Nasdaq: AMTD  ) , which itself showed up further down the list. Several brokerage firms, including E*Trade (Nasdaq: ETFC  ) , Interactive Brokers (Nasdaq: IBKR  ) , and optionsXpress (Nasdaq: OXPS  ) , also earned respectably high rankings. Some others, such as Schwab (Nasdaq: SCHW  ) , showed up in the middle of the pack.

But before you go to the trouble of making a big transfer of your account based on these rankings, take a deep breath and read on. Odds are that you don't need to do a thing.

Personal service
The problem with ranking online brokers is that any comparison is almost by necessity completely subjective. In a few categories -- things like execution speed, commission costs, margin rates, and account fees -- you can easily make an apples-to-apples comparison to find out the difference among different brokers.

But in many areas, different investors won't necessarily agree about which broker may be best. For instance, in the Barron's survey, Interactive Brokers gets a relatively low score for usability, based on the complexity of its trading software platform. Having used both IB as well as other brokers, I can understand why IB got marked down in this area. Its interface does take some getting used to, but in terms of functionality, once you climb the learning curve, you may well end up liking it better than the offerings of other brokers.

The same sorts of difficulties arise in comparing other aspects of different brokers. Grading brokers on the research they provide certainly makes sense, but with so much independent research available on the Internet, you don't necessarily need to have your broker provide your sole source of information about stocks and investing.

False assumptions
In addition, any survey will make some basic assumptions that may not apply to you. In this case, Barron's compared costs for people trading 500 shares of stock or 10 options contracts. But if you make trades of different sizes, then your results may vary widely from those in the survey. If you tend to invest in high-volume stocks with lots of liquidity such as Microsoft (Nasdaq: MSFT  ) , then trade execution isn't necessarily going to be as important than if you buy and sell shares of smaller, less actively traded companies. Moreover, if you don't buy or sell your stocks all that often, then the importance of minor differences in cost simply aren't as important to your overall results as they would be if you were making stock trades on a daily basis.

Last but not least, switching to another broker isn't always a trivial exercise. With a bank account, all you have to do is close your account and either get a check or have the proceeds sent electronically to your new bank. Moving a brokerage account, however, can involve being forced to sell certain holdings, as well as paying hefty transfer fees to move other securities to your new account in kind.

Stick with what's best for you
That's one reason why making a smart first choice with your money is so important. Although you certainly can make a change later or open multiple brokerage accounts, you'd ideally like to pick the best broker for your investing style on the first try. That's where resources like the Barron's survey or the Fool's broker comparison table can give you vital information you can use to match yourself up to the perfect broker for your needs.

But if you've already picked a broker, there's no need to panic if it's not at the top of the list. As long as you've escaped the realm of high-cost full service brokers like Morgan Stanley (NYSE: MS  ) , whose fees will prove a severe handicap to your future success, you've already reaped the lion's share of the benefits that discount brokers offer. Anything else you get is icing on the cake.

So as you look through broker rankings, keep an open mind. What's best for others may not be the best for you -- but by being careful, you can make a pick that you'll be happy with throughout your investing career.

Once you have a brokerage account, you need to know what stocks to buy. Fool contributor Jim Mueller has three stocks you can turn to as automatic wealth machines.

Fool contributor Dan Caplinger is happy with all his brokerage accounts. He doesn't own shares of the companies mentioned in this article. Interactive Brokers Group, optionsXpress Holdings, and Charles Schwab are Motley Fool Stock Advisor choices. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always points you in the right direction.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2010, at 8:14 PM, whitelake wrote:

    We've switched brokers a few times for various reasons and all it took was a signature on some papers. Don't know why one would have to sell stocks.

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