Best Online Stock Brokers
Based on In-Depth Reviews
- 200+Hours of research
- 45+Sources used
- 24Companies vetted
- 4Features reviewed
- 6Top
Picks
- You don’t need a lot of money to invest with an online stock broker
- Many firms offer intuitive trading software and broker-assisted trades
- Managed portfolios are available with automatic rebalancing
- Online stock brokers are regulated by the same agencies as traditional firms
How we analyzed the best Online Stock Brokers
Our Top Picks: Online Stock Brokers Reviews
Best for User-Friendly Trading
Public.com provides straightforward, commission-free trading to experts and novices alike through their proprietary app. The app is designed to be easy-to-use for newcomers to the stock trading world, providing educational content to allow beginners to make an informed decision and even allows for the trading of fractions of a share. Investment options include stocks, ETFs, Treasury Bills, and cryptocurrencies. New in 2023, Public also gives customers the option of investing in the music from the Shrek film franchise. However, bonds, mutual funds, and IRAs are missing from Public's product offering.
This combination of factors makes Public a very attractive starting place for beginners to the stock trading industry. Not only does Public make it easy for anyone to learn the tools of the stock trade, but its social network component allows users to help each other out, sharing their experiences with stocks through the app and allowing friends to see others’ recent activities.
It's important to note that Public’s commission-free trading only applies to self-directed individual investors trading through its app. Broker assisted trades can still incur fees, and regular SEC and FINRA fees may also apply. Public.com has a solid reputation and a wide range of features of educational content that make it a no-brainer for someone that may be intimidated by the traditional stock trading endeavor but is still looking to learn more about it.
Other things to consider:
- A+ rating on the Better Business Bureau
- In-app live chat support
- Large number of articles, FAQs, and glossaries serve as an introduction to investing
- SIPC member
Screenshot Sofi.com. August 6, 2019
Best for Starting Small: SoFi Invest
Unlike most companies that require you to trade a certain number of shares per transaction, SoFi Invest’s innovative approach allows consumers to specify the exact dollar amount they want to invest by offering $1 stock bits.
Also known as “fractional shares,” stock bits are pieces of a single stock or fractions of a stock. Investing in fractional shares is a great way for new investors to get started, as it allows them to learn about the markets as they trade, without spending much.
Fractional shares of ETFs are also available for trade through SoFi Invest’s Active Investing account, which is the company’s self-directed option. Some of the companies you can purchase fractional shares from using SoFi’s trading platform are Amazon, Cisco, eBay, Facebook, Netflix, Lyft, Apple, Twitter and Uber.
Besides its Active Investing accounts, SoFi also has a series of managed portfolios available through its Automated Investing account service. Each portfolio is professionally diversified and tailored to each client’s financial goals and risk tolerance, and features automatic rebalancing and liquidity, so you can withdraw your money whenever you want.
Other points to consider:
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No minimum balance required on any of the accounts, you can get started with just $1
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No transaction or account management fees
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Courtesy access to financial advisors
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Joint accounts available for automated investing
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Access to investing guides and articles
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Mobile app for both iOS and Android devices
New: User-Friendly Options Trading
SoFi has recently rolled out a new feature that's popular with today's investors: options trading. Options trading may be best-suited to more experienced investors, but it offers the opportunity to earn higher returns or limit risk. If you or financial experts predict that a stock’s value is going to rise, you can buy a "call option." Conversely, if you expect a stock’s value will go down, you can buy a "put option."
Options trading is available online or through SoFi's mobile app. There are no commission or contract fees associated with options trading through SoFi. The company offers comprehensive and thoughtul educational resources to learn about options trading and decide whether you're a good candidate for options trading.
Screenshot Merrilledge.com. August 9, 2019
Best for Account Integration: Merrill Edge
Merrill Edge’s self-directed brokerage accounts don’t require a minimum deposit, so you can start with as little or as much as you want to. With a self-directed account, consumers have access to a full range of investments, including stocks, ETFs, bonds, mutual funds and options, in addition to an online platform that is largely jargon-free.
Merrill Edge’s managed portfolio services, Guided Investing and Guided Investing with an Advisor, require a minimum investment of $5,000 and $20,000, respectively. Both portfolios allow consumers to invest in diversified portfolios that are automatically rebalanced for optimal performance and personalized to meet their financial goals. The difference between them is that with a Guided Investing with an Advisor portfolio, consumers get access to financial advisors that will meet with them periodically to offer additional advice on how to achieve their desired goals.
What makes Merrill Edge stand out from other companies is that the company features a streamlined experience that allows consumers to make real-time transfers between eligible Bank of America banking accounts and Merrill Edge investment accounts, in a single platform. Additionally, Bank of America customers can meet with a Merrill Edge financial advisor at any Bank of America financial center and join the Preferred Rewards program, which could get them discounts on some investment products (like the managed portfolios), and qualify for commission-free stocks and ETFs on self-directed accounts.
Other points to consider:
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Choose between personal, joint, or custodial accounts
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Cash and margin trading available
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Access to market research and insights
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$6.95 trading fee for stocks and ETFs
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$6.95 + 75¢ per options contract
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$29.95 broker-assisted trades
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$6.95 automated phone trades
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Mobile trading app available
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Get up to $600 when you open a new self-directed account with a qualifying deposit
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Customer support via live chat, email, over the phone, or at a physical branch
Screenshot Ally.com, August 9, 2019
Most Affordable Portfolios: Ally Invest
Ally Invest is a clear example that investing doesn’t have to be expensive, even if you choose to do so through a managed account. The company offers self-directed trading accounts, as well as Cash-Enhanced Robo Portfolios, cash, and margin trading.
Self-directed accounts allow clients to invest in stocks, ETFs, options, bonds, and mutual funds. They have no minimum balance requirements, but what makes Ally Invest unique is its affordable approach to robo portfolios.
Most companies that allow consumers to invest through a robo portfolio usually require a minimum balance between a couple of hundred and a few thousand dollars to get started. Ally Invest’s Cash-Enhanced Robo Portfolio only require a minimum investment of $100, with a 0.0% annual fee on all balances. The company’s Cash-Enhanced Robo Portfolios are composed of low-cost ETFs, and are personalized based on the client’s financial goals and risk tolerance.
Ally Invest’s Cash-Enhanced Robo Portfolios also offer automatic rebalancing to promote an efficient portfolio performance. Additionally, its platform uses a combination of intelligent tools to help you keep track of your progress.
Other points to consider:
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You must be living in the United States to open a brokerage account
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Commission-free ETFs available
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$0 trading fee for stocks and ETFs
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$0 + 50¢ trading fee per options contract
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Volume pricing available for executing 30+ trades per quarter or keeping a daily balance of $100,000 or more on self-directed accounts
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Intuitive trading platform also available for all mobile devices
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Access to streaming charts, profit/loss and probability calculators, market data and watchlists, among other great tools
Screenshot Us.etrade.com. August 6, 2019
Best for Beginners: E*Trade
With E*Trade, consumers can invest in stocks, bonds, CDs, ETFs, mutual funds, options, and futures through self-directed brokerage accounts, or through one of the company’s managed portfolios. E*Trade has four types of managed portfolios: Core, Blend, Dedicated, and Fixed Income, each with different levels of customization and access to financial professionals.
E*Trade’s intuitive trading platform, Power E*Trade, combines a series of tools like interactive charts, technical pattern recognition, and snapshot analysis. The platform’s sleek design allows consumers to manage, trade, keep track of their investments, access information about market movements, and get the latest news from Bloomberg TV, making it an ideal option for beginner investors who might also benefit from its user-friendly interface.
When you visit the company’s website, you’ll immediately notice that it has a “New to Investing” section, which explains the different types of brokerage accounts they offer, along with a video on the basics of opening a brokerage account. Additionally, E*Trade’s website also features a Knowledge center with information on how to invest, the advantages of trading with the different securities, strategies for retirement planning, and explanations on how the different securities are taxed.
Other points to consider:
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Self-directed and managed accounts require a minimum investment of $500
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Access to over 250 commission-free ETFs and mutual funds
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$6.95 trading fee for stocks and ETFs.
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$6.95 + 75¢ trading fee per options contract
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Accounts can be individual, joint or custodial
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Cash and margin trading available
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$4.95 trading fee for stocks and options, plus 50¢ per options contract when you execute 30 or more trades per quarter
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Up to 500 commission-free trades and $600 cash credit on qualifying deposits of $10,000 or more when you open a new accounts
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Trading app available for all mobile devices
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Customer support offered via live chat, phone and email
Screenshot Firstrade.com. August 9, 2019
Best Overall Features: Firstrade
From planning your investment strategy to helping you estimate your taxes, Firstrade offers a one-stop platform to fulfil all your investment needs. With Firstrade you can trade stocks, options, mutual funds, ETFs, and fixed income securities, like bonds and CDs, through both cash and margin accounts.
What we liked about Firstrade is all the features it has to offer. The company has partnered with Morningstar to provide its clients with the most up-to-date information on market trends. It also offers plenty of research tools, including the Market Heatmap, which shows each of their stocks’ monthly performance.
Firstrade offers a Cash Management account, which allows clients to spend, manage and invest their money in one place. The account doesn’t have any set up, check writing, annual, or ATM fees. On the downside, it requires a minimum balance of $25,000, but it should be noted that it includes a zero liability policy for unauthorized transactions and travel/accident insurance.
Something that makes Firstrade stand out from other online stock brokers is its tax planning tools. The company offers tax bracket estimators and guides on how the different securities are taxed, plus discounts on TurboTax, to simplify this process, making it an excellent option for the DIY investor.
Other points to consider:
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No minimum required to open a self-directed account
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$0 commission on all trades
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You can open an account, even if you’re not a U.S. citizen or permanent resident
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Extended hours trading available
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Customizable dashboard
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Friend referral bonus available on qualifying accounts
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Transfer from another broker and get up to $200 in transfer fee rebate on any qualifying account transfer
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Electronic access to all your brokerage documents
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Trading mobile app for both iOS and Android devices
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Dividend reinvestment plan and broker-assisted trades available
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24/7 customer support via live chat, and on regular business hours over the phone and email
Honorable Mentions
Even though Robinhood and TD Ameritrade didn’t make it to our top list, we still think that both companies deserve to be mentioned, as they do have some features worth checking out.
First, let’s talk about Robinhood. Robinhood offers browser and app-based trading platforms and consumers can invest in stocks, ETFs, options and cryptocurrencies. The company doesn’t charge trading fees on any of its investment products for cash or margin self-directed accounts, but other SEC and FINRA fees may apply. To invest with margin, consumers must upgrade to the Robinhood Gold service, that has a monthly charge of $5, plus a 5% yearly interest if you borrow over $1,000. On the downside, the company doesn’t offer managed portfolios. Gold users have access to research tools, but aside from that, you’re on your own, so it’s best suited for those who have some market knowledge.
TD Ameritrade doesn’t require a minimum balance on its self-directed accounts and consumers can invest in plenty of securities, including stocks, bonds, ETFs, mutual funds, forex, futures, options and cryptocurrencies. Something we really liked about the company is that clients can test the different platforms before trading. TD Ameritrade also offers 24/7 assistance via live chat, a mobile trading app, and tons of tools and resources. However, it should be noted that the company’s trading prices are average, compared to other online stock brokers, and its managed portfolios are a bit expensive, with the Essential Portfolios starting at $5,000.
More insight into our methodology
Investing can be a complex topic, especially for those starting out, which is why, before choosing our top picks, we took on the task of exploring the ins and outs of investing over an online service.
As part of our journey, we conducted over 200 hours of research and gathered information from approximately 45 sources, including studies, articles, reports and research papers from various institutions and regulatory agencies. We also interviewed experts in different areas of the brokerage and financial fields, as well as real people that have actually used online trading platforms, to gain a better understanding of what consumers need in an online stock broker.
Once we understood the big picture, we were able to establish a series of guidelines to evaluate the different companies. We started with a list of 24 online stock brokers. Some of these companies were brick and mortar firms that had decided to expand their business with an online platform, while others were independent online firms.
We evaluated these based on the investment products and types of accounts they offer, minimum balance requirements, trading platforms, available tools and resources, pricing and discounts, and methods of communication. We also took into account the amount of regulatory actions, arbitrations or complaints filed against them, and finally, their overall reputation among consumers by checking their profiles on consumer review websites, such as the Better Business Bureau.
We were able to narrow down our list to 13 companies, from which we chose the top six that exceeded our expectations when it comes to these categories.
Investment Products
When you invest, the chance of losing money always exists. However, experts agree that some investment products are riskier than others. In our search for the best online stock brokers, we looked for companies that offer a variety of securities, such as stocks, bonds, ETFs, mutual funds, options, futures and forex—as well as commodities, like gold, natural gas and oil, and other less common investment products, like cryptocurrencies, just to name a few.
Features
Each investor has a personal preference regarding portfolio management. Some like to take full control, researching and making all their decisions independently—while others would rather have a professional handle it. Our top picks provide both self-directed accounts, that allow you to trade as frequently as you want, and managed portfolios based on your financial goals and risk tolerance.
We also chose companies whose self-directed and managed accounts allow cash and margin trading. With a cash account, you can only trade using the funds available in your account. Margin accounts, on the other hand, let you borrow investment money from the broker, but the Federal Reserve Board states that these accounts should have a minimum base capital of $2,000 of your own money. If your broker doesn’t require this minimum, we’d recommend looking into the reason why. Brokers charge interest rates for margin lending, which vary from one company to the next, and you’re usually allowed to borrow up to 50% of the value of the assets that are eligible for this type of trading.
Some of our top picks also offer other account features, such as account rollover, access to actual brokers, simulators and calculators, easy-to-use platforms, mobile apps, and integration with other accounts.
Pricing & Fees
Depending on the online stock broker you choose, you may be charged fees for account rollovers, broker-assisted trades, wire transfers, check writing, account maintenance, withdrawals, account transfers, and account inactivity, among others, in addition to the standard commission and margin lending fees.
We decided to feature companies that charge lower-than-average fees, or that offset their standard-priced fees by including other products or services at no charge. We also preferred companies with a variety of available discounts, such as volume pricing and commission-free stocks or ETFs.
Customer Support & Reputation
As part of our evaluation process, we looked up each of the firms on FINRA BrokerCheck, to see the number of regulatory actions and arbitrations filed against them, and selected the ones with the least number of complaints. The FINRA BrokerCheck is an online tool designed by the Financial Industry Regulatory Authority so consumers can view, among other things, an investment firm’s regulatory standing.
We also researched the number of consumer complaints filed against the firms on the Consumer Financial Protection Bureau, which is the US government agency that ensures consumer protection in the financial sector by monitoring business practices and collecting consumer complaints.
Lastly, we chose companies that offer a variety of methods of communication and with an overall strong reputation across different consumer review websites. They all had to be members of the Securities Investor Protection Corporation, too, to ensure that consumers are protected in the worst-case scenario.
Helpful information about Online Stock Brokers
It’s been nearly 11 years since the September 2008 economy collapse — a collapse that most economists consider the worst financial crisis since the Great Depression of the 1930s. According to a report by the Pew Charitable Trust, the Federal Reserve estimates that the United States lost approximately $7.4 trillion in stock wealth from July 2008 to March 2009.
Fortunately, both the economy and the stock market have since recovered, but some remain wary about investing. A 2018 survey commissioned by the FINRA Investor Education Foundation and the CFA Institute revealed that although income and debt are still a major obstacle for young Americans to start investing, lack of knowledge is also an issue.
It is a common misconception that in order to begin investing, you need to have a substantial amount of money. While it is true that most full-service brokers require large deposits for you to get started, online stock brokers pose a more affordable option, some with account minimums as low as $0.
Online Stock Brokers vs. Full-Service Brokers: What’s the Difference?
Online stock brokers, also called “discount brokers,” allow you to buy and sell securities at lower commission rates than their full-service counterparts. With an online stock broker you’ll rarely interact with an actual stock broker, as they tend to offer limited investment advice and most transactions are executed online. Some of them do have physical branches and offer broker-assisted trades that can be placed over the phone, typically for an additional fee. However, you’ll have access to other tools and resources, like intuitive trading software, asset estimators and information on current market trends, to help you start trading.
Oftentimes, people confuse online stock brokers with what’s known as “robo-advisers.” Just like online stock brokers, robo-advisers offer investment management services at a reasonable cost through a virtual platform, but their strategies are completely different.
Online stock brokers offer a hands-on investment approach, allowing you to build your own portfolio composed of stocks, bonds, options and ETFs, among other securities. Robo-advisers provide a more automated experience, where you invest through a series of algorithm-driven portfolios that are personalized according to your financial goals and risk tolerance. Some of the most popular robo-adviser firms are Betterment and Wealthfront, both of which offer diversified portfolios and automatic rebalancing.
Full-service brokers allow you to trade a wide range of securities, but rather than placing the trades yourself, a licensed stock broker does it for you. Full-service brokers also provide other resources that are typically not available through online stock brokers, such as retirement and estate planning, wealth management, financial advice and tax assistance. They also have physical branches, which helps explain their higher account minimums and fees.
Both online stock brokers and full-service brokers accommodate different financial circumstances, goals, and needs. For example, if you have a considerable amount of money, zero time to manage your account, and would like a guided experience along with other financial services, then a full-service broker might be right for you. However, if you have modest savings, don’t mind doing a considerable amount of research necessary to polish your skills, and you feel confident enough to trade on your own with little to no additional advice, then an online stock broker may be a better fit.
Online Stock Brokers: A Closer Look
As previously stated, online stock brokers primarily conduct their business through a digital platform, which is why they require lower minimum account balances and offer more affordable trading fees than traditional brokerage firms. Regardless of how much you’re planning to invest and the company you choose, it’s important to understand some key terms and educate yourself about the different types of portfolios and investment products, as well as how they generate income.
Self-directed vs. Managed Portfolios
One of the biggest decisions you’ll make right off the bat when choosing an online stock broker is whether you want a self-directed account or a managed portfolio.
A self-directed account allows you to build your own investment portfolio and be completely in control. You choose the investment products or securities you’d like to trade (stocks, bonds, options, ETFs, etc.), the amount, and when you’d like these transactions to happen. Trades themselves are subject to market hours, but some companies do allow after-hours trading.
Self-directed accounts require lower account minimums than managed portfolios, typically ranging from $0 to $100. In addition to volume pricing, some companies also waive maintenance and other administrative fees for executing a certain amount of trades per month, making them an ideal option for frequent traders who have some market knowledge and would like a more active experience.
Managed portfolios are designed for consumers who are interested in a more passive approach. Account minimums vary greatly from one company to the next, but usually range between a couple of hundred and a few thousand dollars. To create an investment strategy that works for you, managed portfolios take into account your financial goals, timeframe (short-term or long-term) and risk tolerance.
To maximize your earnings, online stock brokers usually offer at least three portfolios to choose from with automatic rebalancing. Some of them feature access to financial advisors or other investment professionals, along with investment tracking tools. Managed portfolios are best suited for those willing to invest a bit more and who feel more comfortable letting someone else manage their assets.
Common Investment Products
Stocks
Stocks, also known as “equities,” are issued by companies when they want to launch new products, pay off debt, expand their business into new markets, or open additional branches. Investors who purchase stocks basically own a piece of the company. In the long run, they offer higher returns than other securities— which makes them very popular— but they’re also highly volatile. A stock’s value fluctuates according to market conditions and the company’s financial performance, which is why they’re considered to be an aggressive (or high-risk) investment strategy.
Stocks can be common or preferred. Common stocks allow investors to vote at stockholder meetings and receive dividends. With preferred stocks, investors receive dividends prior to common stockholders and have higher priority in asset liquidation if the company goes under. On the downside, preferred stockholders usually don’t have voting rights at stockholder meetings.
Common and preferred stocks can also be classified as growth, income, value and blue-chip stocks. A growth stock is one whose earnings increase at a faster rate than the market average, but usually doesn’t pay dividends. Investors commonly buy growth stocks in hopes that they’ll make money through capital appreciation, which is when an asset’s value increases. An income stock is one that pays dividends consistently. Value stocks are those whose value has fallen on the market. They can be common or preferred. Investors buy them at a discounted price, with the expectation that the market has overreacted and the stocks will regain their value. Blue-chip stocks are those belonging to big companies with a long history of consistent growth. These stocks are considered “less risky” than others, and typically pay dividends.
Bonds
Bonds are loans made to corporations or other types of organizations from the private sector, as well as to municipal, government and federal agencies. When you invest in a bond, the issuer or entity that’s borrowing the money establishes an interest rate and a maturity date.
Bonds are considered a fixed income investment, since you receive money through a series of interest payments on a fixed schedule. Additionally, if you keep the bond until its maturity date, you’ll be able to recoup your principal amount.
Because bonds are a fixed income investment, they are less volatile than cash investments like stocks, thus offering lower returns.
Mutual Funds
A mutual fund is a program created by an investment company that allows investors to purchase shares from its portfolio, composed of stocks, bonds and other commodities. Mutual funds are professionally managed and have higher costs and fees than other securities, but offer plenty of benefits. One of their main advantages is that they provide a high level of diversification, which can result in better returns.
Besides a diversified portfolio, mutual funds offer liquidity, meaning that shares can be easily sold at any time for their current net asset value, minus any redemption fees.
Some of the most popular mutual funds are equity, bond, money market and balanced funds.
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Equity funds are those that invest primarily in company stocks. They’re considered an aggressive type of investment and have the greatest growth potential out of all the other mutual funds.
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Bond funds invest in corporate or government debt. They’re less risky than equity mutual funds and offer lower returns.
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Money market funds invest in short-term debt such as US Treasury bills, commercial paper and certificates of deposit. They are extremely low-risk and offer high liquidity.
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Balanced funds, also known as “hybrid funds,” invest in both stocks and bonds. They have lower expense ratios than other mutual funds, but offer a decent amount of income and capital appreciation.
ETFs
Just like mutual funds, exchange-traded funds (ETFs) offer investors the opportunity to purchase shares from a diversified portfolio that may contain stocks, bonds and other commodities, but their similarity stops there. Unlike mutual funds that can only be traded once a day when the market closes, ETFs can be traded throughout the day in exchanges, just like stocks. These trades are typically done by investors, not by a brokerage firm, which is one of the reasons why they’re more affordable than mutual funds.
There are many types of ETFs, but they usually fall under two main categories: index-based and actively managed. Most ETFs in the market are index-based. Index-based ETFs have lower costs than those that are actively managed. They replicate a particular market index, like the S&P 500 stock index, investing in the same securities to obtain similar returns. Rather than following an index, actively managed ETFs invest in a diversified portfolio that is managed by an investment firm. Their main goal is to outperform other market indexes to obtain better returns.
Options
Options are contracts by which the purchaser has the right—but not the obligation, to buy or sell a security, such as stocks or bonds, at a fixed price on a specified date.
Options are usually classified as call or put. A call option allows buyers to purchase shares of an underlying security at the strike price, which is the preset value established by the options owner, for a specified period of time. The strike price will determine whether you’ll make money on the transaction. A put option allows the buyer to sell shares of an underlying security at the strike price within a specified period of time.
For example, an ACME October 60 Put, allows the buyer to sell an ACME (fictional company we’re using as an example) stock at a strike price of $60 until October. Conversely, an ACME October 60 Call, allows the buyer to purchase an ACME stock at a strike price of $60 until October.
Futures
Futures are a type of financial contract where two parties agree to buy or sell a security or commodity at a fixed price on a specified date in the future. They are similar to an options contract, the main difference being that with a futures contract the investor is required to buy or sell these assets at the agreed value within its expiration date, regardless of their current market price.
Futures allow investors to speculate on the upcoming value of an asset. One of the main advantages of investing with futures is that brokers usually don’t require you to come up with the full contract amount in advance. Still, this type of product is best suited for more experienced investors or those with extensive market knowledge.
A Note on Cryptocurrencies and Other Investments
Besides the usual stocks, bonds, mutual funds, ETFs, options and futures, some online stock brokers also offer cryptocurrencies as part of their investment products. Cryptocurrency is a medium of exchange (currency) that exists in the digital world and uses encryption techniques to track its value and ownership. Cryptocurrencies first came into the scene in 2009, with the release of the bitcoin, which is still the most popular cryptocurrency to date. Other important cryptocurrencies include the ethereum, litecoin, dash and ripple.
When we asked Peter Krull, CEO and Director of Investments at Earth Equity Advisors, a company that specializes in responsible investment management, financial advisory and planning, about investing in cryptocurrencies, he told us that he doesn’t think it’s a good idea for new investors. “When you buy a cryptocurrency, you’re basically just buying something with not necessarily any underlying value. It is only worth what the market prices it at,” says Krull. Still, he believes that blockchain, which is the idea behind cryptocurrency, is going to be important moving forward. Cryptocurrencies are extremely volatile and there are no real investment strategies for them, which is why they’re not the best option for those with limited market knowledge or low-risk tolerance.
Other investment products that are considered safer and are also available at some online stock brokers are certificates of deposit, annuities and precious metals, like silver and gold.
Investment Income
Before you invest, it is crucial to understand how the different securities or investment products generate profit, so you know what to expect in terms of returns and taxation.
Investment income is the money you earn through your assets’ increased value. This type of income primarily comes from three sources: dividends, interest payments and capital gains.
A dividend is a payment issued by a company to its shareholders, which represents a portion of its profits. Public companies usually pay them on a fixed schedule, but there are some exceptions known as “special dividends” or “extra dividends,” in which the company pays an additional amount that was unscheduled. Dividends can be paid in cash, shares, or other property. Investments like stocks, some mutual funds, and ETFs pay dividend income.
When you invest in bonds and other fixed-income investments, you’ll earn money through interest payments. An interest payment is an amount you receive on a fixed schedule for the money you’ve borrowed. Unlike dividends that are only paid to stockholders if the company makes profits, interest payments must be paid on a regular basis until the loan reaches its maturity date, whether the company makes money or not. The interest earned can be simple or compound, depending on the investment product.
Simple interest is calculated based on the principal loan amount, while compound interest is calculated using the principal loan amount, plus any accrued interest. Regardless of which type of interest you earn, interest payments are considered safer than dividends, since they don’t rely on the company’s financial performance. However, they tend to offer lower returns.
Capital gains are the profits made from selling an asset at a greater value than its original purchase price. For example, if you purchased an AMZN stock at $60 and sell it a year later at $70, that means that you obtained a capital gain of $10. In addition to stocks, funds and bonds are also associated with the production of capital gains.
Regulations
The Financial Industry Regulatory Authority (FINRA), which is the non-profit private corporation responsible for protecting U.S. investors against unfair and dishonest practices by regulating brokerage firms and exchange markets, defines a broker-dealer as any person or company that is in the business of buying and selling securities on behalf of its customers, for its own account, or both.
Online stock brokers allow investors to purchase and sell securities through their virtual platforms, meaning that they’re considered broker-dealers by FINRA’s standards. Just like any traditional brokerage firm, online stock brokers should be members of FINRA as well as be registered with the U.S. Securities and Exchange Commission (SEC), in order to conduct business.
The SEC is the federal agency that enforces federal securities laws and regulates the securities industry, including electronic markets. It also oversees FINRA. It was created in 1934 to restore the public’s confidence in the U.S. markets after the crash of 1929. Its primary mission is to protect investors, maintain efficient markets, and facilitate capital formation.
Besides being members of FINRA and being registered with the SEC, online stock brokers should also be members of the Securities Investor Protection Corporation (SIPC). The SIPC is a federally mandated, non-profit corporation that protects investors in the United States against the loss of cash and securities up to $500,000, with a limit of $250,000 for cash.
It should be noted that the SIPC does not protect investors against losses caused by the decline in value of their securities, against losses caused by bad investment advice, or if they purchase worthless stocks or other securities. The SIPC’s insurance is designed to protect investors in case their brokerage firm fails, even if the investor is not a U.S. citizen.
Before choosing an online stock broker, it’s important to check the company’s standing with each of these entities. You can check it by visiting FINRA BrokerCheck, where you can simply enter the name of the firm and search for its current registration status, and for any regulatory actions or arbitrations filed against it. You can also find out more information about the brokerage firm by contacting your state’s securities regulator. You can find your state’s securities regulator by visiting the North American Securities Administrators Association’s website.
Should You Invest?
Investing wisely can serve as a tool to help you build wealth faster and achieve short-term goals like a big purchase, as well as long-term goals like saving enough to retire comfortably, or even retire early.
One thing to keep in mind, according to Emmanuel Dávila Martínez, former investment officer, is that “at the end of the day, when you invest, you’re assuming a risk. You can minimize that risk by educating yourself, but there’s always a chance you might lose money.”
Things to Consider
Once you’ve come to terms with the fact that you might gain or lose money by investing, there are a few things you should take into account prior to opening a brokerage account, mainly your financial situation, market knowledge, and risk tolerance.
Your Finances
The first thing you should assess are your finances. If you have substantial debt and little savings, then the best thing would be to wait until you’ve managed to get that debt under control and have a rainy-day fund before you start investing.
Krull told us that, ideally, individuals should be “saving more than they’re spending or making more than they’re spending,” before they invest. In other words, you need to invest money that is not compromised in any way, shape, or form.
Your Market Knowledge
While some online stock brokers do offer access to actual brokers and other financial professionals, this is not the norm and it usually comes at a price. Investing through a self-directed account is cheaper than using a managed portfolio, but that also means that you’re basically on your own.
If you’re confident enough about your trading skills or are willing to put in the time and effort to learn about investment strategies, then a self-directed account might be right for you. If you feel more comfortable letting someone else design a strategy for you, or if you don’t have the time to do the research on your own and would like a bit more hand-holding, then a managed portfolio might be your best option.
Risk Tolerance
When it comes to investing, risk tolerance is defined as your willingness to lose money in hopes of getting a better result. Having a high risk tolerance means that you’re willing to invest in securities that are more volatile, like stocks, at the risk of losing your initial investment, to obtain a higher profit. Having low risk tolerance means that you prefer to invest in safer or more conservative securities, like bonds, even if that means obtaining lower returns, in order to keep your initial investment.
Younger individuals tend to have a higher risk tolerance than those that are closer to the age of retirement. Examining your risk tolerance, should be one of your primary considerations before investing, since it will help you determine the types of securities you’d like to trade.
What You’ll Need to Get Started
As previously discussed, online stock brokers must adhere to some rules and regulations, just like traditional brokerage firms. Part of this is obtaining certain information prior to opening an account to avoid any future liabilities. Some companies may ask for more details than others, but the standard information you’ll be required to provide is:
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Your full name
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Address (both physical and postal)
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Phone number
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Email
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Date of birth
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Social security number or taxpayer identification number
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A copy of a government-issued ID, such as your driver’s license or passport
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Employment information
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Annual income
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Bank account information (particularly if you’d like to fund your account through direct deposit)
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Brokerage account information (if you’re transferring an account from another firm)
In addition to these details, most companies will also ask you what your investment goals are and your desired risk tolerance to determine the best type of account for you.
What To Watch Out For When Investing with an Online Stock Broker
High Fees & Commissions
By cutting down on services that are commonly available at traditional brokerage firms, like personalized estate, retirement, and financial planning, online stock brokers are able to offer an affordable service for those interested in investing a modest amount and that don’t mind ditching all the extras.
When we asked Gerri Walsh, president of the FINRA Investor Education Foundation and senior vice president of Investor Education at FINRA, about things you should watch out for when choosing a brokerage firm, she stated that regardless of the type of broker you choose, it’s important to ask yourself “how much am I paying? Either for advice or for the product. How am I paying? Is it money that comes out of the mutual fund or out of the ETF? Or is it money that comes out of my pocket in the form of a commission?”
Depending on the company you choose, in addition to the usual trading commission fees, you may end up paying account maintenance, withdrawal, account rollover, wire transfer, inactivity and broker-assisted trade fees, just to name a few. These charges can quickly add up and take a toll on your earnings. It’s important to do research and ask yourself these questions to determine whether you’re really saving money or if you’re better off investing somewhere else.
Not Diversifying Enough
Let’s say you have a portfolio primarily composed of stocks of a certain tech company because it had been doing well for the past year. Sadly, their latest products flopped, causing a downturn in sales. Since these stocks represented 80% of your portfolio, that means you’ve lost a significant amount of value.
“Any investor should be diversified. By ‘diversified,’ that means that you own a basket of different types of securities or investments. If you’re starting out, an easy way to have a basket is by investing in a mutual fund or an exchange-traded fund,” says Krull.
Experts recommend having adequate asset allocation or diversification to maximize your profits and reduce the chances of losing your initial investment and, by “adequate,” they also mean not over-diversifying, since this could also be detrimental for your returns. Some online stock brokers take over the asset allocation task by offering a variety of diversified portfolios that cater to different levels of risk tolerance and by incorporating automatic rebalancing.
Red Flags for Poor Investment Practices
Since online stock brokers are not investment advisers, they are not bound by fiduciary responsibilities, so the products they sell or advertise are not necessarily the best ones for you. That doesn’t mean that all online stock brokers are bad, since some of them will give you recommendations based on your best interest, but it’s not their obligation.
When considering any company, regardless if it’s an online stock broker or a traditional brokerage firm, “the first thing you should do is look up the firm in FINRA BrokerCheck, to confirm that it is registered with FINRA or the SEC, to take a look at how long the firm has been in business, and whether it has a history of customer complaints,” suggested Walsh. This will help you determine whether the company has a history of poor investment practices.
Walsh told us that they always say “ask and check”, as one of the main strategies investors should use to protect themselves against any potential scams. If an opportunity seems too good to be true, it probably is. Likewise, if you receive unsolicited offers, or are encouraged to make a rushed decision, the SEC encourages you to do your research before investing, since these are common tactics used to scam individuals.
Besides checking the company on FINRA BrokerCheck, the regulatory agency also offers a helpline you can contact to help you clear any doubts you may have about a brokerage firm. If you’re interested in doing a more extensive search, Investor.gov also lists multiple resources you can explore.