How to Choose An Online Broker

Choosing an online broker can be a real pain in the butt. There are dozens of companies to choose from, each with its own commission rates, research offerings, software platforms, margin rates, mobile applications, blah blah blah…

You get the picture.

But the process of picking a firm to handle your investment activities is actually easier than you think. There is a ton of marketing noise out there trying to convince you that you need this fancy new iPhone app or that charting tool or a mutual fund analyzer. If you’re like 95% of the population, you’ll only use 25% of your firm’s capabilities.

So how can you tune out all the garbage and make a decision? Just ask yourself the following three questions:

1) What are my priorities?

Think about about the big things you can’t live without. Do you want to do business in person? If so, you’ll want a firm that has a branch network. Do you want to trade foreign stocks? Or trade stocks from your BlackBerry? These are the types of things that should be the primary driver of your decision.

In other words, what are your dealbreakers? Once you identify them, you should be able to narrow down a list of candidates pretty quickly.

2) What am I willing to pay?

This is a trickier question than people think because there is a lot more to cost than trading commissions. Receiving checks and statements by mail, closing accounts, executing wire transfers, exercising, and a million other things all have different costs depending on the firm you’re with. So really think about the services you currently use, and what you might use in the future.

However, if you are a heavy trader, you must look at firms that offer low-cost trading options. The difference between firm A and firm B can be fairly significant when you multiply it by hundreds or thousands of trades per year. And keep in mind that big commission generators can often negotiate lower rates with any firms – so don’t just go by what you read online. Pick up the phone and give them a call!

3) Do I need a lot of handholding?

This is a fairly tricky question, simply because difficult to determine a firm’s customer service accumen. If you’re a DIY-type who likes to figure out new software programs on your own and who has trading experience, then customer care may not be a big deal to you.

But if customer service is a major priority for you (it is for me!), then ask around to your friends, or even folks on online forums about their experiences with their brokers. One of the reasons I went with Thinkorswim was its stellar customer service reputation. Other firms offer cheaper commissions, but I’ll gladly pay up to have my problems solved efficiently, the first time, every time.

My recommendations:

I wholeheartedly recommend Thinkorswim to any investor willing to take the time to learn its software platform, which can be overwhelming to beginners. I found it easy to use after 30 minutes of playing around, but it is incredibly deep, especially when it comes to options. I’ve also heard many good things about Scottrade, OptionsXpress, and TradeKing. For more information on individual brokers, check out our online broker database.

I also recommend that investors consider opening accounts with multiple firms. Despite what anyone, including me, tells you, you’ll never know how you like a brokerage house until you start doing business with them. Sure, you might get hosed paying some account closure fees, and you’ll have extra paperwork at tax time, but it’s worth it if you find the right relationship.

At the very least, play with every trading platform you can access. Some firms will allow you to give their software a test run, so take advantage of them.