Top 3 Brokers: How to Choose an Online Broker

If you are ready to start investing, the first step is selecting a broker. Brokers can be specific individuals, but in this case, we will be discussing our top 3 brokerage firm picks. What does a broker do? Brokers execute trades on your behalf. Whether you want to buy or sell stock or other investment types, such as exchange-traded funds, your broker will execute the order. Therefore, you need a reliable and trustworthy broker with competitive fees.

Types of Brokers

When selecting a broker, you have two basic options - a full-service broker or a discount broker. The majority of online brokerage services are discount brokers, so that is what we will discuss. Under a discount broker, you make the decisions about what to purchase and sell, and the broker simply executes the trades. In contrast, a full-service broker will provide individualized advice and guide your trading decisions. While some may prefer to employ a full-service broker, it is not a necessity. Even with a rudimentary knowledge of investing, you can successfully select index funds. Choosing individual stocks requires more experience and analysis, but with a little practice, you can develop that skill as well.

What should I look for when selecting a discount broker?

Low Fees

Carefully review your broker’s fee schedule to determine what fees are charged. For the average investor, investing in an index fund, such as the Standard and Poor’s (S&P) 500 will provide a competitive return and diversification. Assuming you choose to invest in an index fund, you will want to examine the expense ratio. The expense ratio is the fee that the broker charges to manage the fund. Even though you do not have a full-service broker, there are fund managers who oversee index funds and determine when to reallocate money between the investments. For example, the top five holdings in the fund may be Microsoft, Apple, Google, Amazon, and Nvidia. If the fund manager determines there is more value in another investment, then this allocation could be adjusted. For funds like the S&P 500, the expense ratio is minimal because the amount of oversight to manage the fund is limited. The more active the management required, the higher the expense ratio will be.

No Commissions

A commission is the amount charged to execute a trade. This could be a flat fee, such as $7 per trade, or it could be a percentage of the trade, such as 1%. For a discount broker, a flat fee is more typical. For example, if you buy 20 shares of Coca-Cola, and the commission rate is $7 per trade, then you will pay $7 at the time of purchase and another $7 if you ever choose to sell the stock (assuming the brokerage commission remains unchanged). Regardless of whether you purchased 20 shares or 100 shares, a flat-rate commission does not change. However, it is very easy to find a broker who does not charge a commission, so verify this before making your selection. Given the growing number of online brokers and the increased competitiveness, you can easily find a no-commission broker. However, do not let the lack of a commission be your only decision factor.

Analysis Tools

It is important to consider the analysis tools available on the broker’s platform. Almost every broker offers an array of analytics that you can utilize to choose stocks, evaluate performance, and review financials. If these tools are not available or are inadequate, this will be a red flag.

Reputation and Performance

Finding a reputable broker is essential. After all, you are trusting this firm with your future. Therefore, carefully review the firm’s credentials and reviews from their customers. The vast amount of consumer-provided feedback available makes it simple to weed out those brokers who are lacking in customer service or other areas. Additionally, review the broker’s performance. How has the broker performed compared to the stock market as a whole?

Top 3 Online Brokers

When it comes to reputable brokers with a proven track record, three stand out:

Fidelity
Charles Schwab
Vanguard

By choosing any of these brokers, you will take advantage of low expense ratios, proven historical performance, and an array of online tools to assist you in your investment journey. Given that all three are attractive, we will take a look at a few metrics to see how they compare. For comparison purposes, we will examine an S&P500 index fund from each broker. All fees are based on online trades and were obtained at the time this article was written. Ensure you verify whether any fee schedules have changed.

Fidelity

No commission on stock trades
No annual service fee
S&P 500 (FXAIX) expense ratio: 0.015%
No minimum investment required
FXAIX 10-year return: 11.8%
FXAIX 5-year return: 12.5%

Charles Schwab

No commission on stock trades
No annual service fee
S&P 500 (SWPPX) expense ratio: 0.020%
No minimum investment required
SWPPX 10-year return: 11.76%
SWPPX 5-year return: 12.48%

Vanguard

No commission on stock trades
$25 annual service fee (waived if you sign up for e-statements)
S&P 500 (VFIAX) expense ratio: 0.040%
$3,000 minimum investment required
VFIAX 10-year return: 11.78%
VFIAX 5-year return: 12.48%

As you can see, all three brokers are attractive. None charge a commission for standard stock trades. Only Vanguard has an annual service fee, which can be waived by signing up for electronic statements. The expense ratios for all three are low, but Vanguard’s is approximately double that of Charles Schwab and Fidelity. Additionally, only Vanguard has a minimum investment amount. Finally, the 5-year and 10-year returns are comparable. For an index fund like the S&P 500, it is common to see similar returns. If you were selecting a less standardized index fund that the brokers manage, then you would want to pay close attention to the variations in performance.

Conclusion

Choosing the best broker is important. The fees and commissions you pay will have a long-term impact on your return. Therefore, it is necessary to carefully review the broker’s fee and commission schedule. The more fees you pay, the less money you have available to invest. Fidelity, Charles Schwab, and Vanguard all offer competitive rates. Therefore, you cannot go wrong with any of these brokers. Given that Vanguard does have a minimum investment amount, Charles Schwab and Fidelity are slightly more enticing from that perspective. However, you will want to compare the performance between the fund types you are considering to make the best choice.