Before anything else, I want to first start off by making sure you are not falling into one of the biggest myths out there for new traders. The myth being, the first thing I need to do as a newer trader is sign up for an online broker.
I get it. You want to be a trader. In order to be a trader, you need an online broker – therefore, the first thing you need to do is open up a broker account. This is 100% logical, but unfortunately in the world of trading, the logical thing to do is not always the right thing to do. Believe it or not, opening an online brokerage account is one of the last things you should be doing. Like any profession, you first need to learn how to properly do it.
Would you give a loaded gun to a child? Of course not! So why would it make sense to have a brokerage account as a “child” when you don’t know what you’re truly doing? Another way to view this concept can be seen in this analogy video below.
If you are reading this, then you are not “brand new” as I define in the above video (if you did not watch the above video, and you’re still just plowing along, NEWS FLASH, you are cutting corners, and that’s NOT something you want to get in the habit of doing as I explain HERE), so let’s continue our journey into figuring out what broker best suits you.
I am going to first start with a non-negotiable rule, and then I will walk you through some questions you should be asking yourself in order to best determine what broker fits your needs.
In regards to the brokers that are recommended, I should note that I am getting paid zero dollars and am not an affiliate marketer or anything of that nature. The brokers being discussed are being done so because of the pricing structure and the feedback gathered via members of my private trading community.
There is one aspect in this day and age of technology that must be addressed as the first point of this guide: online broker. The age of calling in your orders to a broker are done. I don’t care if you are intimidated by computers and the internet, it’s time to learn! It will pay you. What do I mean it will pay you? I will be using this theme/logic throughout the guide, so I might as well address it now. One of my favorite quotes comes from Benjamin Franklin when he says,
A penny saved is a penny earned.
Keeping this quote in mind, you should see why you NEED to use an online broker. Check out the below screen shot taken from one of the well-known online brokers. The actual broker does not matter because what you see below is a universal fee structure.
To trade a stock online: $7. To go the old school route of calling in to speak with a broker: $32. In other words, by using the online order placement method, you are “saving” (and therefore “earning”) $25 right off the start! Another way to look at it, you are saving 78% of your money by NOT using the “Broker Assisted” route.
I hope I’ve made my point, but in the event you need a tad more convincing, below you can see another well-known broker’s fee structure.
In this case, by using the internet, you are “saving” (therefore “earning”) $35 compared to calling in and using the “Broker Assisted” choice. This is pure craziness!
There should be zero debate or negotiation about this rule. Use the internet to place your orders. It’s as simple as that and it’s not an opinion, it’s a mathematical fact.
There are many products/instruments across the markets, so simply telling yourself that you want to “trade the markets” is way too broad. And in all reality, you are actually doing a disservice to yourself because you could very well end up choosing the wrong broker.
Perhaps you’re thinking you want to do a mix. That’s fine, but you need to choose one that you believe will be your “go-to” strategy and base your broker selection off that one.
For the sake of this guide, I will only be discussing brokers for stocks and options.
If you are not sure, then no worries, it is not the end of the world. Remember, you can always change brokers if you need to, although let’s do our best to avoid that hassle from the start.
How am I defining “active”? If you do three trades* or less during a week, so 12 or less during a month, then I would consider you a non-active trader.
This is my number 1 choice when it comes to a broker for investing. They sound too good to be true on the surface, but they are legitimate. Not only does M1 Finance offer $0 commissions, but they also allow you to buy partial shares (which is a huge plus). On top of this, they offer tax friendly accounts which others (such as Robinhood) do not offer. Over the long term, tax friendly structures and partial share purchases add up in big and efficient ways! CLICK HERE to sign up and you get $10! (full disclosure, I also will get $10.)
If you plan on doing more than three trades per week, then I would consider you someone who really wants to be active in the markets. With this being the case, you need to be more focused on commissions since you will be doing a much larger volume of trades.
This is where things get a bit tricky, so you will need to ask yourself a final, but very important question.
If you are still reading, you should be someone who already is, or plans to be an active trader, so with that in mind, let’s look at what I would suggest*.
In this case, as far as I’m concerned, you have two choices. One is a tad cheaper than the other; however, they are close enough to just say, “Choose what you like best in terms of personal feel.” The two choices…
*Are you 25 years or younger? If so, then Interactive Brokers will give you access if you have $3,000 or more.
There are a few routes you can go at this point. Let me first throw one more number at you, that being $2,500 or more. If you are at or above this, then I would look into…
While customer service is not going to be nearly as good as it would be with one of the bigger name brokers, at $2.50 per trade for stocks or $.50 per option contract, it might be worth the trade-off? Only you can personally answer that.
Along with the customer service issue, in the event the trading platform/tools are not really what you are needing or wanting, there is a way you can get creative. It also leads into the scenario out there for traders with less than $2,500.
So at this point, you are sitting at one of two spots…
Regardless of which spot you are in, I would recommend you look into…
A broker that opens the door for many of you traders who will be starting with a smaller amount of capital. You can see their very favorable commission structure in the image below. With no minimum funding requirements for a cash account and only $2,000 for a margin account, you really can’t go that wrong. While the charting features may not be complex, they have every indicator that most of us in the ClayTrader community use including moving averages and various oscillators. The platform is also extremely lightweight for those of you on older computers or laptop users. You can find out more information and open an account here.
While on your quest for a broker, the above three questions are going to be the “Big 3”; however, depending on your situation, there may be some other aspects you need to consider. I want to quickly address each of these that seem to be pretty common from my experience.
I really wish I could get into each and every countries choice for online brokers, but that is just not reality. Assuming you would like to trade the US Markets; Interactive Brokers is going to be your best bet, no matter what country you are in. They by far have the widest international customer service.
The easiest way to approach this is to just yell, READ THE FINE PRINT! It is a broker by broker issue as they all have different policies towards this, but when you are looking at the commission/pricing, get out your magnifying glass to read those tiny words. As an example, here is Just2Trade’s pricing page…
To give Just2Trade credit, they make it very easy to see, but just be warned, not all brokers have it this “clear” when it comes to their penny stock policy. If you are looking at a penny stock and plan on buying 20,000 shares of it, just know that your commission will be $60. In other words, if you want to trade penny stocks, Just2Trade is not going to be the broker for you.
Many new traders ask (rightfully so, it’s a good question) which broker they should use to avoid the pattern day trader rule. The answer: it has nothing to do with the brokers as it is a US Government regulation. While some may direct you to “other” brokers to encourage you to get around the rule, I will never recommend to anyone an off-shore broker. If you want to put a bulls eye on your back for the IRS, then be my guest, but you did NOT hear it here to do such a thing.
If you are annoyed by this rule, there are some ways to avoid it by getting creative (all perfectly legal) which I talk about in this free video.
This absolutely needs to be a question you are asking yourself. As I mentioned in the opening section of the guide, I am paid zero dollars from any of these recommended brokers. If, while doing your research, you come across someone talking about a broker that you’ve never heard of, be a bit skeptical. Are they being paid to send you to this broker? There are some very shady/crappy/moronic brokers out there that are being recommended, for the simple fact that the person recommending them gets paid if you sign up, so be aware.
There is no right or wrong answer here, it is purely a matter of what “makes sense” to you and helps you to remove emotions from your trading. For some people, it is all about the fundamental analysis and looking at projections and balance sheets. If you are in this camp, then the good news is, the internet is your friend and you have plenty of resources available to you.
If you are like me, and choose to use technical analysis (the use of price charts), then it gets a tad more tricky, but is not terrible. Most brokers have price charts included with their platform, but in the event you do not like their offerings, there are many third party chart providers. To learn more about this, GO HERE and scroll down to the Stock Chart Providers section of the page.
I by no means am proclaiming to have all the answers when it comes to this broker stuff. I very well could be leaving out (or not aware of) another solid broker available for the many different situations people can find themselves in. If you have a suggestion, recommendation, update (maybe some new promotions come around?), then please leave it in the comment section below. I’d like to get a “living conversation” going about all of the current and most effective choices out there among brokers, and the only way to truly do this is to have you as readers contribute.
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