Tips on choosing your online broker
Oct 29 '00
Choosing a broker that is suitable for you, as simple as it sounds, is actually a daunting task. Most investors usually go through several brokers before settling on one that they are comfortable and are happy with given their needs and personality. It usually ends up being via trial and error that the investor eventually finds the right broker. It shouldn't be so hard if everyone took the time to do a trial run or a "trade test" of their prospective broker before finally transferring all his assets over. I've compiled a list of tips that may hopefully help in your choice of brokers.
1-Ask around. Ask your friends, co-workers, relatives, family, anyone who has a brokerage account and their experiences with their broker. If someone has a bad experience with a broker, chances are, you will most likely encounter it too if you deal with them. Ask about what they thought of their broker and how often they trade. Depending on the type of trader you are, what may be right for some may not be right for you. Determine if your friend's personality is similar to yours in terms of trading. Chances are, if your friend is an investor that buys and holds and like to talk to his broker on the phone, the broker may not be right for you if you like to buy and sell for a quick profit and don't care much about talking to a broker.
2-Go through the web, read magazines or other sources for a choice of brokers to choose from. Do a bit of research on the services of the brokerage firm. A lot of magazines periodically cover brokerage firms and do a "test" on their efficiency, service, commission costs, etc and publish it in an issue. Search the web on the brokerage firms and see what others have to say about the firm. And, of course, read epinion reviews on the brokerage firms covered for unbiased reviews. Gomez.com also has a listing of US online brokerage firms that are rated on various criteria such as service, commissions, etc. and also provides a comprehensive comparison of brokers.
3-Check out their web sites and go through it. What services do they offer? Do they offer IPOs (Initial Public Offerings)? Can you trade options? What about bonds? Can you trade them online? What types of research tools do they offer? Are they free or will you need to pay? Do you get discounts on research tools such as newsletter subscriptions, business magazines, books, etc? What about real time quotes? Do you get unlimited quotes or are they banked and credited each time you make a trade? Do they offer streaming quotes or Nasdaq level II quotes? What about the execution time of your trades? Is your broker exempt from having to review all your orders before they're submitted to the exchanges? In Canada, securities laws require all brokers to review client orders to their file's investment objectives before submitting it to the exchanges. Thus, it may take minutes before the order gets submitted to the exchanges. In a rapidly moving market, that could mean potential losses of money on either side of the transaction. But, it looks like a lot of discount brokerages are applying to be exempt from such suitability review of client account since they provide no investment advice and thus should not require to review their client's orders. You will need to check with your broker for such information. I don't believe that there is such a law in the US as I think most orders go directly to the exchange. As I don't hold a US brokerage account, I can't say for sure.
4-How much do they charge for commissions? Does it cost more if it is a limit (specific price) order? Most investors are attracted to those TV ads from brokers such as Ameritrade, Datek, etc where they advertise such cheap commissions of $8 or something ridiculously low. What they don't realize is that the commission is for market orders and limit orders cost considerably more.
A market order is an order in which the trade is filled at the "best possible price" at the current time. If an investor is in a hurry to buy or sell a stock, then a market order is what he needs to place. But, as it is a market order, the price that the trade gets executed can be much higher or lower than the current bid and ask, depending on when the trade gets filled. Market orders are supposed to be executed as soon as it is received but sometimes if there are many market orders, it may take a little while to be executed. What some investors also don't realize is that if you place a market order, that the broker could be buying or selling your shares from its own inventory, at whatever price is supposedly trading close to. I find that a scam as the broker knows perfectly well what the current bid and ask is and can decide to get the best price for the firm to sell or buy the shares to/from you. If you check your trade confirmation carefully, you can easily determine whether your order was filled from the broker's inventory or from another broker. If it says that the broker was acting as the "agent" for the transaction, then you bought your shares from another broker or investor. If it says that your broker was acting as "principal", then your broker sold or bought the shares from its inventory.
As market orders are dependent on the current bid (highest price a purchaser of a stock is willing to buy) and ask (lowest price a seller of a stock is willing to sell) prices, you may pay much more for a stock or get much less from a sell than you have intended. Unless you are in a hurry to buy or sell a stock, I would recommend placing a limit order for the current "market" price rather than placing a market order as you will get filled on the order at the price you stated. For example, if the current bid price of stock XYZ is at $10 and the current ask price is $10.05, rather than placing a market order to buy XYZ, if you place a limit order of $10.05 (the ask price), you will be almost guaranteed to get filled at $10.05 almost immediately as you've hit the ask price. But, if you place a market order, even if the current bid and ask price are the same, you may get filled at $10.10 or more if the market participants see your order and adjust (remove their ask prices) to $10.10 or higher. Yes, there are many market participants out there (including daytraders who profit from this) who have the real time quotes with the bid and ask lots and the breakdown of them who can profit from the sudden market order that you place. I always place limit orders so that I'm guaranteed of getting filled. And, sometimes, you may get filled for less than the ask price if the price goes down. And that has happened to me a few times too.
Back to commissions. Is it a flat rate for up to a specific limit? How much does it cost for shares over the flat rate limit? Personally, I prefer flat rate commissions as I know exactly how much I'm charged for commissions. Some brokers charge a minimum commission and then depending on the price of the stock will charge an additional few cents per share. I dislike these brokers as I find that after taking everything into consideration, the flat rate is cheaper. I dislike having to pay differing commissions on trades depending on the price and size of the trade.
5-What kinds of online help do they provide? How helpful is their online help or FAQ (Frequently Asked Questions)? Does it answer the questions you want to ask? If it doesn't, what are the alternatives to getting an answer? Do they allow you to email them your queries or can you call them 24 hours a day, 7 days a week with your problems or concerns? And, how quickly do they email an reply back? Does the firm have a policy on how quickly they state will return all correspondence? Do they adhere to it? And when you do call the broker, how helpful are the telephone representatives? How knowledgeable are they? Do they conduct themselves in a professional manner? If they promise to get back to you, do they do so within a reasonable amount of time, or do they even get back at all?
6-Besides online trading, can you trade over the phone? Do they provide an automated telephone trading system that allows you to trade without much problems or hitches in case the online trading site goes down? Believe me, that happens quite frequently. You could be submitting an order and waiting minutes for the order confirmation page to load only to find that there was an error and your order still hasn't be submitted. In cases like this, the telephone trading system sounds great as there is a lesser chance of errors or problems, although it does take a bit of time to get used to pressing the telephone keypad for the corresponding ticker symbol. (eg. What in blazes name is the code for the symbol Q?!!!!) Telephone trading is a great backup should you need to, or when you are away from your home internet connection. I rely on it when I can't get net access.
7-What other fees do they charge? How much does it cost to transfer out your account to another brokerage? How much do they charge for administration fees for your RSP or IRA? How much do they charge for mutual fund loads? Do they provide rebates on back end load mutual funds? Can you negotiate the front end load fees? If they don't charge front end load fees, how much does it cost to redeem it? What about no load funds? Do they charge any fees for no load funds?
8-What is the minimum deposit required to open an account? Most brokers require $1000, some $500. What restrictions or requirements are there to open an account? Brown & Co. require investors to have at least 5 years experience trading and a specific household income level to be accepted.
9-How easily accessible are the funds in the account should you need to access the money for emergencies? Can the broker wire the funds to your bank account or will they have to mail you a cheque? What about deposit of funds into the account? Can you do online banking and deposit money into your brokerage account? Especially in volatile markets, it is very important to be able to either withdraw money from your brokerage account or deposit money into the account to take advantage of buying opportunities.
10-Do they offer after hours trading? What are the hours of operation for the after hours trade? Are the commissions the same or do they cost more? Do they offer it online or do you have to place it over the phone with a representative?
11-Do they offer any incentives for opening an account? Do they rebate you for any transfer out fees charged by your previous broker or provide any incentives to transfer your assets over to them? Some brokers provide a certain number of free trades in your account but it may not amount to much if you discover that you have problems trading through them.
Once you've narrowed down the choice of brokers, you should carefully test each one for the features and services you desire.
-Open up an account with the broker. Don't deposit all your money into the account. Just deposit enough for you to be able to test out the capabilities of the broker. Once you're happy with the level of service, you can always put more money in and transfer all your assets in.
-Place a trade online. Go through the whole process of placing a trade with the exception of not wanting it to get filled. That means, place the limit price to something that won't get executed that day. And, yes, that means place a "day" order (a trade that will expire at the end of the day should it not get filled). So, suppose you want to place a buy order for IBM and the current trading range for it is 100-105. Place a day order to buy IBM at 90 and submit it. It will most likely not get filled and you get the feel of how to place the trade. Every brokerage firm will have a different way of placing a trade. You might discover that you don't like the way the broker has drop down menus, or doesn't timestamp your fill orders, etc. You won't know until you place the trade. You will also discover how fast or slow the web page loads and also the trade execution time. My suggestion is to place several different "unfillable" day trades at different times of the day to test the trade executions and web page loading times.
-Place an "unfillable" trade via the automated telephone trading system much like I described above to test out the execution time of the telephone trading system and its reliability.
-Call up the broker and ask a few questions to gauge the professionalism and product knowledge of its staff. This also gives you an idea of how long the wait time typically is to speak to someone. Call up the customer service regarding your account questions and call the trading agent to change your "unfillable" order to another "unfillable" limit price to test the wait time for the broker.
-Take advantage of the tools and special features of what the broker offers, such as real time quotes, research tools, email alerts, etc. to see if they are useful to you. Just because a broker has a lot of bells and whistles doesn't mean that you will need to use them.
-Once you've decided on the broker you are comfortable with, you may want to ask them if they provide any incentives for getting your business. If you have a sizeable investment portfolio, they may offer to rebate you for the transfer out fee that your previous broker charged to transfer your account out. Or, they may credit your account with free trades. Keep in mind that free trades are great, but if you have problems placing trades through the broker that the free trades don't amount to much. I've had similar problems with E*Trade Canada that I've finally just bit the bullet and transferred out without getting my trades rebated. If interested, please read my horrible experience with E*Trade Canada to avoid the same mistakes that I made:
http://www.epinions.com/finc-review-2A8B-E695D0D-39AB24CA-prod6
Also, during the busy RSP season (in Canada) from January to February, most brokerage firms offer to pay for transfer out fees for RSP accounts. This is the best time to transfer account to take advantage of having to pay the costly transfer out fee of $134 ($125 + GST) out of your own pocket. There may be similar promotions in the US, I don't know.
-If you do proceed with transferring your accounts, take photocopies of your recent brokerage or mutual fund statement and attach it to the transfer forms. It will speed up the transfer process. And, also keep a copy of the transfer form itself as brokerage firms tend to lose them and blame them on the mail (typical excuse). Make a note of when it was sent out and follow up on it when it takes over a couple weeks to ensure they received it. And, always keep track of every correspondence with the firm whether it was verbal, written, etc. Jot down the date, time, who you spoke to and what it was about. In the event that something goes wrong, at least you have documented it and hopefully someone will make concessions.
Choosing a broker is a difficult and time consuming task. It really all depends on the individual's needs and his choice of the balance of services he can be comfortable with. No one brokerage will offer everything. It is up to the individual investor to determine what is most important to him and find the broker that is most suitable for him. I hope that this review has helped someone in making that decision.
For more information on related topics, please check out my reviews:
Mutual funds vs. individual stocks
http://www.epinions.com/finc-review-51D4-B2E330E-39F5C821-prod2
Online Discount vs Full Service Brokers
http://www.epinions.com/finc-review-18FD-236D9478-39F4C00A-prod3
As always, thanks for taking the time to read and rate this review.
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Epinions.com ID:
maceyr
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Location: Canada
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I hardly have time for Epinions anymore but do try to read and rate.
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