Happy Monday to everyone. Today I’m glad to bring you a great guest post from my friend John at Frugal Rules. Please take a moment to visit his site if you enjoy the article!
We’ve all seen the commercials for online brokerages; one has a green line, another wants you to talk to someone named Chuck, and still others have celebrity pitchmen telling you to take control of your financial future with their platform. They’re all members of the multi-billion dollar online brokerage industry. Up until the last few decades, if you wanted to invest in the stock market, you had to go through a high priced broker that might charge you several hundred dollars. With the advent of online brokerages, that price has seen a significant drop. However, it has also put more of the responsibility on us as self-directed investors to be aware of what’s going on with our investments. As someone who’s worked in the financial services industry for over ten years, and in the discount brokerage industry for four of those years, I have some wisdom to share about choosing an online brokerage.
Price is Important, But Only to a Point
As someone who likes to be frugal, price is an important subject for me especially when I can get the same thing done for less. Most online brokerages will charge you anywhere from $3- $10 or more to place a stock trade. I can tell you that many of these discount brokerages are only being charged $2 or so a trade at the market. The rest of the cost you pay is pure profit to them and will go towards their overhead costs. Knowing this, don’t be afraid to contact your online brokerage and negotiate your commission. If you’re a good client and ask nicely many will lower your rate, so don’t feel that you have to settle for the advertised commission. The problem I’ve seen though is that many will base their online brokerage choice solely on the commission. Yes, it’s important to save money, but you have to look at what the online brokerage is offering you. If their services are lacking, then you may not be getting a good value, even though you’re paying the lowest price.
Back up Your Online Broker
As with any financial dealing, it’s extremely important to keep record of activities with your online brokerage account. Online brokerages are only required to keep statements on file for six years and trade confirmations for three years. After that, it’s up to the broker as to whether or not they keep the information. The best and easiest way to verify what you paid for that stock 12 years ago is to keep your statements. I’ve spoken to countless people who had a tax loss to take but there was no record of the purchase price because it was so far back and no one had the records. That’s a headache I do not want. Once we receive our brokerage statement we scan our statements so we can access them at any time. It’s also vital to review those brokerage statements once you receive them to make sure they did not make a mistake. Most of the larger brokerages service millions of clients, so it’s certainly possible a mistake can be made; don’t let them go by unnoticed.
Each Online Brokerage Has a Specialty, Find One That Fits Your Needs
Every online brokerage has their own special offering that sets them apart. Some are big on pricing while others are big on educational tools. You’re probably not going to find the perfect online brokerage, but find one that fits with your needs. There are several things I look for, such as the ability to contact at any time of the day, a smartphone app, and chat capability on their website. I am busy, so I want an online brokerage that I can communicate with on my schedule and when I have time. Determine what you’re wanting in a broker and look for ones that are in that realm. When it comes down to choosing an online brokerage, keep in mind that it’s serious business as you’re entrusting your hard earned-money to someone else.
Do you have an online brokerage account? What’s important to you in an online broker?
John is the founder of Frugal Rules, a finance blog that regularly discusses investing, budgeting, and frugal living. John is a father, husband, and veteran of the financial services industry who’s passionate about helping people find freedom through frugality. Visit him at frugalrules.com. Or follow him on Twitter.
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