Investing is the best way to build your wealth, and it's never too early to start. Even college students should be thinking about investing. But in the old days, only the wealthy could afford to do it. If you wanted to buy or sell stocks, bonds, or other securities, you had to do it through a stockbroker who charged a rather hefty fee for this service.
But the internet democratized investing. Online brokers opened up investing to everyone, not just those who could afford a stockbroker. Do-it-yourself investing can be intimidating for those without a lot of experience, but choosing the right online broker can remove a lot of the stress. If you're looking to get your feet wet in the stock market, this beginner's guide to online brokers was written with you in mind.
What is an Online Broker?
An online broker is a platform for buying and selling securities via an online network. An investor can open a brokerage account with an online broker to buy investments like stocks, bonds, and mutual funds on their own.
The online trading platform is the hub where securities can be bought and sold, not so different from a site like Poshmark, a platform where customers of the site can buy and sell clothes.
A good online broker offers users tools like in house and outside research, real-time quotes, charting, analyst reports, and up to the minute news that helps them choose the right investments.
You don't need a ton of money to open an account with an online broker. It can take a few business days for your deposit or transfer to hit your account, but many online brokers don't have a minimum requirement. Although, of course, you'll need to have enough money in your account to cover the cost of the securities you want to buy and the trading commission.
The money in your online brokerage account is insured through SIPC (Securities Investor Protection Corporation) against the brokerage firm going under (a very unlikely occurrence), but, of course, doesn't protect you in the event your investments lose value. (All investing on any platform comes with some risk).
Pros of Using an Online Broker
Low Fees: This is the big one. A fee here and a fee there might not seem like much in the moment, but when you're investing thousands of dollars over decades, even seemingly small fees will add up quickly, especially for high-frequency traders. A typical fee per trade with an online broker will cost you $5-$9.
A Suite of Tools: Buying individual stocks takes some research. An investor needs certain information including the P/E (price/earnings) ratio, a stock's valuation, and the financial health of the company before they can make an informed decision. A good online broker will provide this kind of information on their site in an easy to understand way for their customers so they don't have to chase it down themselves.
Real-Time Monitoring: While constant monitoring of your investments isn't recommended (buy and hold is a more sustainable investing strategy than constantly buying and selling) all investors will want to check in from time to time to see how their investments are doing. The right online broker allows you to do that on their site at a glance.
Cons of Using an Online Broker
It's a Little Too Easy: Have you ever spent too much money on Amazon and wondered why? It's because it's so easy to buy stuff online. A few clicks of the mouse and those boxes are on their way to you. It's the same with an online broker. You can buy stocks on an impulse without doing the proper research or even giving it much thought at all.
Emotional Decisions: Emotion has no place in investing. There is a lot of noise around investing, headlines and television pundits screaming that this stock is a sure bet and financial and economic headlines shouting that the sky is falling. A stockbroker can help you navigate this kind of information so you don't make a decision based on the emotions this noise can create. When you're a DIY investor, you don't have a guide to help you keep your emotions in check.
Best Online Brokers for Beginners
If you're ready to jump into the world on online investing, these are the best online brokers for beginners.
Robinhood is a zero-commission online broker. That's right, the cost to trade stocks, options, and ETFs is $0, and there is no account minimum. This is great for the new or casual investor, but for serious investors, the lack of data tools is not ideal. Robinhood doesn't offer much apart from the price a stock is trading at and a graph showing recent movements in price.
Ally Invest charges $4.95 per stock trade and has no account minimum. The resource center provides customers with plenty of data to help them make smart investing decisions, including a customized dashboard so you can see everything in your account in one place.
Fidelity charges $4.95 per trade and has no account minimum. Fidelity provides high tech tools for your stock research, and they offer tools you can use to plan and improve other areas of your finances. You can see an evaluation of your retirement planning strategy and use the site's estate planning tools.
Just the Beginning
We know investing can seem confusing and something that only "rich people" do, but that's not the case with today's online brokers. Opening up Wall Street to the average investors means online brokers had to up their game to attract those investors.
The best online brokers offer simple layouts, affordable fees, easily understood research, and easy to use tools because they know today's beginners are tomorrow's life long customers.
Take a look at the online brokers we've recommended and find the one that suits your needs. The later in life you wait, the more money you're forfeiting. Your financial future depends on it.