The Internet has revolutionized the way we trade. On May 17, 1792, Wall Street was founded in New York City. Everything was done on paper then, and, of course, there were a lot of pitfalls to having no digital resources. Centuries later, most trading is done online, and paper ledgers are now used only to back up online information. Online brokers have surged in popularity since 1995, when E*TRADE became the first online brokerage firm.
The Massachusetts Institute of Technology has called online trading an “internet revolution.” Despite the prevalence of online trading, choosing an online broker isn’t easy. There are a lot of considerations, and the process is research-intensive. The results are worth it, but they don’t come without hard work.
There are scammers out there, but there are also many reputable online brokers that will work hard to help you grow your trading career. More and more, online brokers are catering to new investors, so a lack of experience shouldn’t be a barrier to starting online trading.
Why should I use an online broker?
Thinking in terms of disadvantages and advantages, you’ll find that online brokers have their pros and cons, just like any other service.
Advantages of Online Brokers
Convenience and cost reduction are two of the biggest advantages to online brokers. These are often quite persuasive, too. Online brokers are faster, allowing you to conduct trades with the click of a button, as opposed to a phone call to a personal broker. Online brokers are also cheaper. Bloomberg found that investors pay an average of just $5-$10 in trade fees with online brokers. These fees are cheaper than what you’ll find with a personal broker, who usually has an average fee of $150.
Additionally, online brokers often have an entire research database, which you can use when trading. Again, this vast database of market research and commentary is available at the click of a button. Lastly, most online brokers offer mobile apps, in addition to websites and downloadable clients. You can complete trades via smartphone, which is great for traders who are on-the-go.
Disadvantages of Online Brokers
As with any service, online brokers have their disadvantages. Namely, they require you to get familiar with technology that can be confusing. Not all software for trading is intuitive. If you’re not technologically proficient, getting started might be a hassle. Additionally, there are online brokers that scam people, especially victims who are not internet savvy.
Is it safe to use online brokers?
That leads us into our next topic, which is whether online brokers are safe to use. Luckily, the answer is yes, if the broker itself is legitimate and regulated. Online brokers are regulated by governing bodies like the SEC, CFTC, NFA, and FINRA. Most of the industry is heavily regulated, especially since the 2008 financial crisis, which spurred Congress to take a hard look at Wall Street.
Legitimate and reputable online brokers are established firms. They have customer reviews, regulation, and a paper trail (digital or otherwise) to their name. Again, finding a reputable broker comes down to conducting research and seeing for yourself that the broker is regulated and abides by the law.
How can I tell if an online broker is regulated?
Generally, you’ll be able to tell if an online broker is regulated on the broker’s website. The broker will usually list its regulation at the bottom of its website. Disclosure laws mandate that the broker include the regulation in its company information.
If not at the bottom of the website, the regulation will likely be in one of the company hyperlinks. Additionally, the major regulatory bodies in the US have their own lists of the companies they oversee. Note: if a broker is not transparent or upfront about its regulation, that is a major red flag.
What should I look for in an online broker?
In addition to making sure that an online broker is regulated, you should also look for an online broker who is high-tech, has good customer service, offers research and data tools, has fast withdrawal and deposit times, and charges fair fees and commissions. There are many more qualities of a good online broker, but these five are some of the biggest ones.
You don’t want to be constantly frustrated, spending your days trying to fix the broker’s software. That takes away from valuable trading time. Make sure a broker has a glitch-free system. Customer reviews are almost always likely to mention if a brokerage firm has technology issues, as that is universally frustrating.
Good Customer Service
Customer service should be responsive, friendly, and knowledgeable. It shouldn’t take a company more than forty-eight hours to respond to an email, and even that’s pushing it. High-quality customer support is a key indicator of a good firm.
Research and Data
A good online broker will offer you research and data tools, which can help you make decisions before you execute trades. Whether this data and commentary is self-generated or outsourced, it is an important database to have at your fingertips when trading.
Fast Withdrawals and Deposits
You don’t want to be waiting weeks for a check to appear in your account. Check to see how long withdrawal and deposit times are. Depending on the method that you use, the time for checks to clear shouldn’t exceed three days. Also, see what methods of deposit the broker accepts to gauge if they are compatible with your financial situation and preferences.
Fair Fees and Commissions
Finally, fees and commissions should affect your decision of which online broker is best for you. Fees and commissions shouldn’t be excessive, and you shouldn’t feel like you’re losing an exorbitant amount of money. Online brokers have been slashing fees and commissions lately, a trend investors hope continues.
Again, there are many more qualities that are important, but these five are the ones most likely to stand out on the day-to-day. Read reviews that include these topics, and always conduct thorough research before settling on an online broker.