How to Choose Your First Broker – Quick Guide

How to Choose Your First Broker

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Before you start investing, there are some basics that you need to get straight about your trading type.

Are you an active trader, or do you want to be a passive investor? Are you passionate about a specific industry, or perhaps you have a list of specific companies you want to invest in?

How much do you plan to invest, and are you looking for low or high liquidity? Then some simply want to retire. However, many baby boomers are making the mistake of planning for retirement without an IRA.

Passive investing and retirement planning may be important, but you can probably earn more by playing the stock market with the right broker. As Robert G. Allen once said, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

Once you determine what your trading personality is, then you will have no problem spotting the perfect brokerage firm. There are generally three types of brokerages:

  •  Full-service broker
  •  Discount broker
  •  Online broker

Most of the time, an online broker is used interchangeably as every popular broker today has an online trading platform or a mobile app. There are also regular brokers and broker-resellers.

Our guide below gives you quick definitions and tips on how to pick the right broker for your first investment account.

What Broker Suits Your Investment Style?

A full-service broker offers you a ton of tools, financial advice, and account management options. It’s more difficult to lose money, and you can typically blame your account’s broker if you do lose money for making bad investments. In exchange, you must keep an account minimum and pay a fee for account management.

A discount broker removes all of the financial advisors, some tools, and account management options. You won’t pay commission fees either. The result is a stripped-down way to invest on your own. Most online brokers today are discount brokers that offer robo-advisors and research tools that you can learn on your own.

There’s also a difference between regular brokers and broker-resellers. With a traditional, regular broker, you typically work with a more trustworthy firm that makes trades through their own proprietary system.

This may lead to higher-quality trades, but that’s not all the case. Brokers like TD Ameritrade and Fidelity are regular brokers and also maintain memberships with Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SIPC).

Broker-resellers are typically more affordable to work with, but you should check out their services and rating before you get an account.

Costs and Fees for Brokerage Accounts

You may not have a big budget for investing, but that doesn’t mean you can’t start. While commission-free trades are currently trending, there are other fees to worry about, such as inactivity fees or account maintenance fees. There are also minimums and margin rates to consider. Here is a breakdown of these costs:

  •  Minimum account balance: Most brokerage firms require that investors set up an account, and while most maintain that you don’t need to keep a balance, others will also that you maintain $500 at least in the account or you’ll be penalized with a low balance fee.
  •  Margin accounts: If you qualify for a margin account, then you typically have to maintain a higher minimum balance for your account. You may also want to check the current interest rates for margin lending.
  •  Withdrawal costs: Some brokers won’t allow you to withdraw if it means your balance drops below the minimum. Before you sign up for an account, you should read through any withdrawal requirements first.

Are You a Passive or Active Trader?

Your investment style will determine the broker that is best for you. For active traders, low fees on high trading volumes are important. You want to be able to buy and sell as much as you like simultaneously as well.

Other tools might matter more to seasoned active traders, such as algorithmic and automated trading. Day traders specifically look for brokers that have low fees, fast order completion, high-quality trade execution, and automated trading.

If you’re a passive investor, you may simply be looking for a platform that offers standard stock and ETF trading with no commissions. You may also want to look into retirement planning and find a mutual fund that works with your investment style.

Brokers that have more tools regarding retirement calculators, tax-deductible accounts, and lower costs may be right up your alley.

Top Tips to Pick Your First Broker

You may feel confident as an investor, and you can select and buy your own stocks online or through a mobile app. However, stockbrokers and financial advisors may help you find better stock picks and mutual funds that will grow your money faster. To find the best broker, you should consider the following:

1. Pick No Commissions or More Advice

Full-service brokers offer the most advice and little risk for new investors. You get the best stock picks, and any bad investments may be traced back to your broker. Some full-service brokers also offer a guarantee to ensure that your money is invested wisely when you let them manage your account.

However, discount brokers have eliminated almost all commissions on stock trading and ETFs, which means that you can invest for less and gain a bigger profit. This also means that you are largely on your own if a mistake is made.

2. Accessibility and Investor Support

You should be able to contact the customer support team for the broker during normal trading hours at least. Phone support is the best option when you have a problem, but 24/7 chat assistance is also a plus.

3. Shop Around Before Picking One

You can set up an account with a number of brokers. You don’t have to pick just one. These first-time accounts could be a way to test strategies and accessibility. When you’re picking brokers, you also want to look at customer ratings and price improvements. Were investors making more or less with a certain broker last year?

4. Ask for a Referral

Your finance department probably has some accountants with good knowledge of brokers. However, they may also be advanced brokers for active traders. Since you are new, you can get help from those who once started at a certain broker. You can also look at best brokers for beginners to find the best options.

5. Testing Tools and Strategies

Since you are new at this, you should get a broker that allows you to test out trades and strategies using “paper money tools.” TD Ameritrade, E-Trade, and other trade simulator apps allow you to use fake money and play the stock market with real-time streaming data. It’s the best way to learn.

6. Forex Trading

If you want to trade in currencies, then you will use a forex broker or FX broker. These brokers trade in currency pairs and typically offer more liquidity. However, there is a risk that you may lose a lot more if you trade on a volatile currency or go into cryptocurrency. In addition, before you get into an exchange, you may want to read our [best forex broker] guide.

7. Tax Benefits

IRAs have the most tax benefits because you don’t have to pay any taxes when you withdraw money. You can use these savings accounts to play the stock market and grow your nest egg without losing any profits when you need to retire.

Wrapping Up: What’s the Best Broker for Beginner Investors?

Since you are just learning how to play the market, you should learn about the different assets and markets. In that case, the best brokers maybe those with more educational tools, such as E-Trade, TD Ameritrade, and Fidelity.

As you learn more about trading and become more active, you may switch to platforms that are lower cost and streamlined for advanced trading.

About Author

Tim Fries Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim is also the co-founder of Protective Technologies Capital (protechcap.com).