There's more to evaluate than who's offering the lowest commission for online stock trades. Many online brokerage sites promote loss leaders by offering free or nearly free trades, but the bargain is for a type of trade you seldom make, or there's a shopping list of add-on fees.
Here are some points to consider when selecting an online broker:
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If you regularly make trades of 100 or 500 shares, check each broker's commission schedule for trades of those sizes. Occasionally, the lowest rate may apply only to trades of minimum level of assets in your account. Also stocks priced under $1 a share will usually carry a higher commission. Look for less than $15 per trade for any number of shares. A rate below $21 is absolutely essential.
Brokers charge for many things besides commissions. The Part II listings include any transaction or postage and handling fees that apply to all trades, but there are more fees that may be incurred. For example, it can cost as much as $25 to have a stock certificate issued and delivered into your hands. Rest assured that any service that you request above and beyond the execution of a trade will cost you something. Make sure you know what that something is.
Some brokers say they do not require a minimum initial investment. That doesn't mean that they're let you trade stock without any money in your account! Before you make a purchase, any broker will require that some percentage - 15%, 25% or 50% - of the total cost of the trade be in your account. By the way, an IRA account will usually require a lower minimum investment than a regular account. And if you trade options, your broker will expect you to ante up a large sum. These are spelled out somewhere on the site, usually when you Open An Account link.
This rule applies to both small and large accounts. Most brokers offer margin accounts, which let you borrow against the equity in your account to buy more stocks. This is not a free service. Factor in the margin rate when you're at the decision-making process. For large customers, the rate should be lower than brokers call (currently 6 ½ per cent). For small accounts the rate should not be higher than 7 ¼ per cent. Low margin rates are absolutely essential. Remember that, for all practical purposes, margin interest deductions will not effect your income taxes to any great extent. The IRS limits the amount of margin interest you can deduct in any one year.
If you regularly trade options or bonds or mutual funds, make sure that the broker you select trades those securities. Even if the broker trades them, they may not be traded over the Internet and may incur a higher than desirable commission. Be sure to check those commissions.
You need to be comfortable investing on your own: finding stock ideas, researching, making decisions, entering orders, and using a computer. Nobody holds your hands at the discount online firms; in fact, finding a human being to talk to at some online firms can be like hunting for some invisible broker. If you're not comfortable with your own research and order entry on the computer, consider using a more full service broker like Merrill Lynch, Paine Webber, or Salomon Smith Barney. You'll pay more, but such firms can provide research reports, stock ideas and market advice.
Confirming trades with discount online brokers can also be problematic. Depending on the broker you choose, you may get a phone call, e-mail or even snail mail (normal postage service) to confirm a trade. If you need instant confirmation, make sure you get a broker who can provide it by telephone or e-mail. If you get yours in the mail two days after a trade and discover a problem, it could cost you a lot of money. If it's the broker's error and you can prove it, then the broker will make it right. If it's your error, you pay.
Look for instant updates after the completion of each order - as a bare minimum, an accurate account update by the beginning of each business day.
More and more sites are adding real-time quotes, sometimes prorated at the frequency of your trades. But real-time suffers some-transmission or connection delays. Subscriber services for streaming quote data are available, but they usually carry a high premium and/or special software requirements. The type of trading you do will dictate the acceptability of the quote service.
This ability should extend to short sales, AON (all-or-nothing) orders, and stop orders on both listed and OTC stocks. Ideally, bulletin board stocks, Pink Sheet listings, and a wide selection of foreign stocks are also available. Even, if you've never issued an order to short, or any of the other orders, it is nice to have a broker who will accommodate the oddball request on these few occasions when you want it.
Much information is available on other Web sites, but it's a nice feature for brokers to offer as well.
Reasonable means below $20 for one option, below $30 for five options, and below $40 for ten options.
Availability of other services and perks. These include mutual funds, free checking, credit cards, debit cards, Web TV compatibility, research, 24-hour service, tools options, and minimum balances. Some brokers offer rewards for frequent traders in the form of reduced commissions and even frequent flyer miles.
Service is essential in the event that problems arise when trading online. Look for ready availability of courteous live brokers. If you are looking for a new broker, telephone several prospective brokers a few times, asking questions about services of interest. Then avoid those brokers whom you can't reach after a few rings. Is there an 800 number you can call for help? How responsive is the broker to an e-mail? Look at emergency back-up measures: touch-tone orders or personal broker availability? It all comes down to customer support.
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