January 14, 2013, 04:59:00 PM EDT
Deciding to take the plunge and start investing is a pretty big choice in itself. But the next step is often almost as important - choosing a broker to handle all your investing.
There are a lot of misconceptions about brokers, both digital and brick-and-mortar. It's generally not an exaggeration to say that online brokers generally provide a simpler, more user-friendly experience for new investors - as long as you find the right one.
The real key is figuring out exactly which brokerage service is best-suited to your level of skill, your approach to trading and the resources you have available.
Finding different options is never the challenge. There are dozens of online brokers available and a simple web search will turn up countless lists of services or sites designed to compare online brokers. Instead, new investors need to decide what they intend to base their choice upon.
Know what you're paying for, and how much
The simplest comparison is to look at the listed costs for trading through a particular broker. This is always an appealing idea for neophytes in large part because they assume they can easily compare brokers number to number. That can be a dangerous assumption, because a side-by-side comparison will often ignore the nuances of listed prices. Sometimes the lowest-cost option listed by an online broker will apply only to a particular set of services, with other trades incurring higher costs. In particular, more complicated trades involving derivative products like options will often run you more than a normal equity trade. In other cases, online brokers will charge significantly higher fees to book trades through any means other than their online platform, such as by phone or fax.
The other most important cost that new investors have to consider is the minimum balance. Some brokers will ask for as much as $10,000 to start an account, though the norm is closer to between $1,000 and $5,000 and some will not require any minimum at all. But it's not only that $10,000 can be a lot to put on the line for a new investor, but many online brokers will offer different terms based upon meeting a certain minimum balance. So it could be worth going for a more expensive option if you can afford the minimums needed to get lower fees.
Setting the focus
It's worth noting
that comparing online brokers is rarely about finding the best service, since investors can have perfectly legitimate reasons for preferring different brokers based on the way they trade, not just cost.
Most new investors, reasonably, shy away from active trading trying to drive up returns. But for those intent on trying their hand at playing the markets, simply looking for the lowest prices is a good way to find yourself throwing good money after bad. Though most investors do not need to worry about speed and availability, active investors need to be assured that the money they spend on a trade will actually mean that their deal goes through in a timely fashion. The simplest test for these factors is simply to poke the broker's site at different times throughout the day and week. If you start to notice lag when you aren't even trading, you might want to reconsider the service for active trading.
That said, a bit of lag is not a damning accusation for all online brokers. Many companies offer services that are better suited to traders who are more focused on the long term, so any losses from a few moments of lag today will largely be washed away over the course of the investment.
Getting what you want, not just what you need
Particularly for newer investors, however, broker comparisons are going to depend on much more than barebones speed and cost. Different brokers will offer a wide variety of research tools, consulting services, purchase options, product options and other secondary factors that are still worth consideration.
Sometimes traders aren't interested in the added bells and whistles, but even then its worth looking for a broker that offers an interface with which you are comfortable. Whether you want all these tools now or not, being able to find what you're looking for and navigate through the different options means you can always grow into the platform if you choose.
Above and beyond any other consideration, however, investors should be highly skeptical of a broker with a reputation for poor customer service. Even if you're confident in your skills and don't expect to do anything particularly exciting, there's never a guarantee that you won't have some kind of problem with your service. Without a quality brokerage that will work to resolve your issue, you can find yourself in a position to lose more than you wagered.