This article was updated on Oct. 3, 2014.
If you're looking for the best online broker, look no further. Barron's found Interactive Brokers to be the best of "The Best Online Brokers of 2014." But wait -- the folks at NerdWallet named Scottrade and TradeKing as "The Best Online Brokers for Stock Trading." And The Simple Dollar listed Scottrade, TD Ameritrade, OptionsHouse, and E*Trade as the "Best Online Stock Trading Brokers for 2014." Check some other rankings and you'll find other great brokerages, such as Fidelity, Schwab, ShareBuilder, and others getting top marks. What's going on? Well, it all depends on which criteria you use to determine the rankings. And even if all these lists agreed on the "best" brokerage, it might not be the best one for you. It all depends on your needs.
First off, if you're looking for a great online broker because you want to invest in the stock market, then bravo! There aren't many better ways to build long-term wealth. But before you fill out an application form and send in some initial dollars with which to invest, think through the decision carefully. Make a list of the features you want in an online broker, and see how the candidates for your business fare on each count. Below are a few categories to consider.
Definitely consider the trading commissions and other fees levied by any online broker. But you might not want to give this category too much importance, if, for example, you don't trade too often. If you only trade about four times a year, a brokerage that charges as much as $25 per trade will only collect $100 from you. But if you trade 20 times per month, then the difference between a $5 and a $10 trading commission will be $1,200. It's pretty easy to find trading commissions of less than $10 these days. If you plan to be using margin (i.e., borrowing money from your broker with which to invest), look into the interest rates it charges.
Account minimums are important, because a steep one might be a deal-breaker for you. Minimums for regular cash accounts or retirement accounts (think IRAs) at well-known online brokers can be as little as $0 or as much as $2,000 or more. Margin accounts typically have higher minimums.
Mutual funds and other investment options
If you'd like to invest in mutual funds in your brokerage account, look into the range of funds offered by the online brokers you're considering. Some offer a few, and others offer many hundreds. (You can usually invest in a fund directly through the fund company, but it can be easier and more convenient to do so through your brokerage account, if possible.) If you want to invest in options, bonds, ETFs, CDs, or foreign stocks, look into whether they're offered by the brokerage. You might also check the commission costs for these kinds of transactions, as a simple mutual fund trade could cost you just a few dollars or more than $50, depending on the brokerage.
Most reputable online brokerages these days offer research services to their customers, permitting you to read analyst reports on companies in which you're interested or to look up and compare lots of data on all kinds of companies. If you're very interested in using these perks, then look into which online broker offers what. In the Barron's rankings, TD Ameritrade was among the top scorers for research.
It's easy to overlook customer service -- until you're using an online broker and suddenly find that you hate theirs. So do some digging beforehand. Consumer Reports looked at brokerages and financial companies and gave top marks for customer service to USAA, with Scottrade and Vanguard also singled out and fully 10 of 13 companies examined proving very satisfactory. Barron's gave tradeMonster the best rating for service.
Think about other services you might want from your brokerage. USAA, which serves folks in the military and their families, offers much more than just brokerage services, providing banking and insurance, for example. Other brokerages also offer banking services, which might prove handy for you. Just be sure to read through the rules, terms, and fees. Your neighborhood bank or credit union might remain the better choice.
Brick-and-mortar and humans
Finally, think about whether you'd like an actual physical location to visit on occasion. Some online brokers have brick-and-mortar locations, while others are purely online. Similarly, if you think you might want to place some orders in person or over the phone, via an actual representative instead of a recording, look into whether that's possible -- and if it is, what it will cost. Trading commissions can be as steep as $49 or more if you go through a representative with some brokerages, while others have few or no reps available to take your orders. You might try to see what a brokerage's online interface is like -- if it seems easy to use, as many are, you may find you just don't need a human.
To find the online broker best for you, think about the features most important to you. You can compare several well-regarded online brokers in our broker nook -- or check out the rankings linked to near the top of this article for more information. It doesn't hurt to ask around among friends and family, too, to see who seems most happy with their online broker, and why.
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