By Jeff W, BeforeYouInvest
Even in a bad economy, investing is still an important aspect of personal finance. With the convenience of online brokers it has never been easier to open an account. For new investors however, the number of online options can be very confusing.
So what is the best way to choose an online broker to invest with? Here are a few things that I would use to help evaluate an online broker. This is by no means an all encompassing list, but if you’re new to investing it’s a good place to start.
1. Determine Your Investment Objectives
Investing without a plan is like placing bets on a game you don’t understand. Sure you may come away with a few wins every once in a while but in the end the odds are stacked against you and most of us will come away with a loss.
If you aren’t sure what your investment objectives should be here are some good questions to ask yourself:
- Are you investing for retirement or to supplement your income?
- Are you investing money you can’t afford to lose or is it discretionary income?
- What is your risk tolerance?
- Are you investing for the short or long term?
These are just some examples of questions that will help you to determine your investment objectives, and ultimately to help figure out what types of securities you should be investing in. The answers will be different for all of us so it’s important for you to figure them out based on your current financial situation. If you still aren’t sure, this would be a great time to consult a financial planner or accountant to guide you in the right direction.
2. Understand Account Requirements
Not every brokerage is an ideal fit for every investor. Some people have been investing for years and have millions of dollars in their accounts. Others are completely new to investing and are just trying to scrape up a few hundred dollars to buy a share or two of Apple because they love their new IPad.
Whatever boat you fall in to be sure you understand all of the account requirements at the brokerage you sign up with so you don’t find yourself socked with unnecessary fees or penalties.
- Does the broker have a minimum account balance?
- Do they charge an annual maintenance fee?
- Do they charge inactivity fees if you don’t make a trade every so often?
These are all questions to ask yourself before you open an account. Many brokerages will answer these questions in their online FAQ section, but if you don’t see them you could always call and ask their customer support department. Which brings us to the next tip…
3. Evaluate Customer Support & Resources
When it comes to choosing a broker, one of the most overlooked aspects of opening a new account is customer support.
No matter how careful you are and no matter how much you plan, we all make mistakes, have computer freezes (looking at you Windows!) or lose internet service. So what happens if you are in the middle of making a deposit or placing a limit order? Will your brokerage be there for you when you actually need them?
Barrons and SmartMoney provide great ratings for customer support and I would highly recommend starting there for your evaluation. Don’t forget to consider the broker’s customer support hours either. If you work a full time day job then a broker with customer support that is only open from 8AM to 6PM Monday through Friday isn’t much help to you, no matter how many stars Barrons or SmartMoney give them.
4. Compare Trade Commissions and Fees
Admit it, you thought this would be step number one didn’t you? After all we see commercial after commercial from brokers offering the “lowest commissions” on trades only to have their competition undercut them by a few cents a couple of weeks later. Seeing all of this brainwashes us in to thinking that a $4.95 trade will make us rich, while a $7 trade will force us to invest for ten more years to make up the loss! Fortunately that’s not really the case.
Unless you are an active trader the difference between a $4.95 per trade broker and a $7 per trade broker really isn’t going to amount to much at all. The typical “buy and hold” investor (though I support Jim Cramer’s “buy and homework” strategy personally) is not going to make enough trades to make a significant dent in their return on investment.
This is not to say that finding the lowest commission broker isn’t a good thing, every little bit counts these days, but it shouldn’t be the most important aspect of finding a new broker either. Personally I would rather have good customer service and an array of trading tools than save a couple bucks a few times a year.
5. Take Advantage of Broker Promotions
I almost didn’t include this part because signing up for a service based only on a promotion can be dangerous. That said, many online brokers are offering excellent promotions for new investors who open an account with them.
Typically these benefits include either free trades or a cash bonus if you maintain your account for a certain period of time. Other brokers offer special gifts for new accounts (at the time I write this one broker is offering a free computer monitor).
Free trades, cash back and gifts for opening a new account are great, and you should definitely take advantage of them, but only open an account if you’re sure the broker is right for your investment needs first.
6. Find Reviews From Actual Customers
So you’ve found your perfect online broker… no minimum, low commission, great customer service and tools and you even get a handful of free trades… so now you should sign up right?
Just one more thing… see what other investors are saying before you open your account.
One of the things that works great for me whether I’m buying a pair of shoes or a new TV is to read user reviews. The reason I do this is because if a large group of people doing anything, some will have problems… it’s inevitable. With social media tools like Facebook and Twitter (and now Google +) all of these problems rise to the surface very quickly.
The same goes for online brokers. Look around the web for user experiences for each broker and/or ask friends, family or co-workers who may have had experience with the broker as well. This may uncover some issues or concerns that you may have not yet considered but could save you down the line.
What Happens After You Sign Up?
When you finally do settle on a broker and open an account, don’t worry you still have options if you don’t like your broker, or prefer to switch to another. Bear in mind however that transferring accounts between brokers often can result in fees, which is why it is important to do some investigating before opening a brokerage account.