When one is considering to start investing, there a number of things that may come to mind. How much should I be investing? When should I start investing? What should I be investing in? How do I get started? The getting started piece is usually the biggest question mark of all, as uncertainty around this will be the first deterrent for anyone who wants to start investing.
For many folks who want to take a passive route to investing but want to have some control over their money, using a robo advisor or online brokerage is the best path to go. In Lesson 52, robo advisors are described as “essentially an algorithm that’s been programmed to offer you investment products that best suit your needs and criteria, without the human interface experience”. Online brokerages are websites that allow you to invest a portfolio of securities and cash through an online trading platform. Online brokers offer an alternative to using conventional financial advisors to invest in stocks, bonds, ETFs, options, and other financial products.
Not only are online brokerages readily available and easy to get started with, it allows for easy transfer of funds to and from your bank account into your investing online accounts. According to a 2021 Statista study, there are over 105 million online brokerage accounts that are open in the United States. While this may be partially attributed to individuals having multiple online brokerage accounts, it still puts into perspective the number of online brokerage accounts that are actively being used.
While there are a large number of online brokerage sites available for Canadian and American investors, it may be difficult for someone new to investing as to how to go about selecting the brokerage that works best for them.
I talked a bit about this topic in Lesson 20: Alphabet Soup, and perhaps this post is a bit of an update to this Lesson. However, I did want to elaborate and add some additional content around selection criteria to use in order to select an online broker that works best for a particular individual. An online broker that is best for one person may not be the best one for another person for a variety of reasons.
As a result, there are a number of selection criterion to consider when selecting a broker. Let’s sort through the alphabet soup of online brokerages and take a closer look at what this criterion entails:
Trading platform user interface and target investor
Experienced traders / professionals vs beginner investors
Ease of use and user friendly
Mobile trading platform
Different online brokers are tailored towards different types of investors. For example, some platforms may be tailored towards beginner investors who want a more passive investing approach, whereas some platforms are designed more for sophisticated trading and technical analysis. Both may be very good brokerages, but a sophisticated investor looking to trade interest rate swaps on the London Stock Exchange will not want to be trading on a platform that doesn’t allow for trading outside of stocks and bonds in Canada. The opposite holds true too, where a beginner investor may be overwhelmed with a complex trading platform that shows real time updates of the option Greeks for different equity option spreads, and offers 8 different kinds of transaction order selections as opposed to a simple buy and buy limit order selections.
The more simple platforms that are targeted towards beginner or passive investors will typically be very user friendly and be designed to help guide someone through the investing process without having to resort to finance and investing jargon. Again, this may not be suitable for the more experienced professional trader. Most, if not all, online brokerages also pride themselves on having a compatible mobile trading platform. Mobile trading platforms may restrict the number of trading choices available to the user as compared to a computer based platform when logged into the online brokerage portal.
Investment products and trading tools offered
Commission free ETFs and stocks
Complex financial instruments: forex, commodities, metals, forwards, futures, swaps
Margin and shorting
Many online brokerages offer the same types of investment products, but only some offer more complex trading and investment products. All brokerages will allow users to buy and sell stocks and ETFs, but only some will offer option trading and other more complex products and instruments such as foreign exchange (FOREX), commodities, metals, forwards, futures, and swaps.
The brokerages that are tailored towards less experienced or passive investors typically offer commission free ETFs to incentive users to purchase ETFs as a way to gain instant diversification in one’s portfolio, regardless of the amount of capital being used. Some brokerages will only enable access to more complex financial instruments if the user takes and passes an aptitude test, or proves otherwise that they have experience with trading such complex instruments.
When it comes to shorting stocks and trading on margin, again only some brokerages offer this to users. Simpler passive investing targeted brokerages will not offer margin (i.e. trading on borrowed funds), or shorting stocks. Different brokerages may have different terms and conditions around margin requirements and maintenance margin levels as well. Availability to short also depends on whether there are shares available for shorting across the brokerage platform (this issue is usually specific to more illiquid stocks). A stock with shares available to short on Qtrade may not have shares available to short on Quest Trade.
Investing Research Tools and Financial Data Availability
Historical Data
Valuations and fundamentals
Financial Statements
Technical Data and Charting
When it comes to financial research, there are a lot of third parties that offer this service usually for a fee. There are some sites like Koyfin or Morningstar that have some financial information available for free, but the amount of information available is usually very limited. An advantage that some brokerages have is that they have access to and/or present financial information and research tools available to users. This is something that is a huge bonus for a self directed investor that likes to do company research themselves before making a decision, and better yet, do so within the same platform as where they trade. A lot of the more simpler online brokerages do not offer any research tools, technical chart analysis, or other financial analysis beyond the basic high level financial data typically provided when looking up a stock.
Commissions and other broker fees
Transaction fees to buy and sell
Margin rates
FOREX fees
Deposit and withdrawal fees
Surprisingly, commissions to trade and management fees vary widely across online brokerages in North America. As mentioned before, some brokerages offer commission free ETFs and stocks, while others charge a flat rate per trade regardless of the volume of shares being traded. Margin borrowing rates also vary across different brokerages, as well as foreign exchange fees when converting currencies across accounts, or within accounts. Some brokerages charge a fee every time money is deposited or withdrawn from your online brokerage account, which I personally think is pretty ridiculous. After all, money is money, whether it’s in one account, or split across five accounts.
I’ve touched upon the primary factors that should be taken into consideration when selecting an online brokerage account. However, there are a few additional factors that shouldn’t be ignored either. I won’t go into grave detail here because I think each bullet point speaks for itself.
Deposit and withdrawal time to complete
Some brokers allow instant access to your funds once you’ve initiated a funds transfer from your bank. Other brokerages may take up to 2 to 3 business days in order to access your transferred funds.
Minimum Account Balances
Some brokerages charge a fee if minimum account balances aren’t being met, or if trading activity is less than a particular threshold (i.e. 10 trades per month). For the more user friendly and beginner investor platforms, this is typically a non issue.
Account Types Offered
Non Registered
Registered (RRSP, TFSA, ROTH IRA, IRA)
Accessing different account types should be a non issue, but may depend more so on your residency status within the jurisdiction you are investing in. For example, a non-Canadian resident cannot open a TFSA account, nor can a non US resident open up an IRA or ROTH IRA account.
Customer Service
A lot of brokerages offer online chat and 24/7 customer service support. I actually find this extremely beneficial, especially if you are trading more complex instruments, or are just simply looking for guidance on the logistics of trading and using the platform.
Subsidiary of parent bank company that you do personal banking with
If your bank has its own online brokerage platform, this may be important to you. This allows for ease of transfer of funds to and from your bank account with your brokerage account, with usually instant access to these funds. An example of this would be having a TD bank account and a TD Direct Investing brokerage account.
Licensed
This goes without saying, but yes… any online broker should be licensed within the proper jurisdiction they reside and do business in.
Now that we are familiar with all of the factors that should be considered when selecting a brokerage to use for investing, let’s put them to the test. I’ve provided my own picks for best online brokerage, as well as provided a ranked list of top brokerages in Canada and the US from StockBrokers.com below:
Canada Top 5 Ranked Brokerages (Stockbrokers.com)
Questrade - Best Overall
Qtrade Investor - Best for Research
Interactive Brokers - Best for Professionals
TD Direct Investing - Diverse Trading Tools
CIBC Investor’s Edge - Transparent Fees
Wealthsimple - Long-term Passive Investing
US Top 5 Ranked Brokerages (Stockbrokers.com):
Fidelity - Best overall, best for beginners
TD Ameritrade - Best trading platforms and tools, best customer service
E*TRADE - Best mobile trading, best for ease of use
Charles Schwab - Best IRA accounts, best broker podcast
Interactive Brokers - Best for professionals, best offering of investments
MakeCents Picks: Interactive Brokers and Qtrade
I use Interactive Brokers for all of my trading and investing, as they are internationally renowned for offering the most expansive list of trading tools, while offering extremely low trading fees and margin rates. I do also have a legacy Qtrade account for my Canadian RRSP investing account. For financial research, I use Qtrade as well as an app called Koyfin that offers pretty decent financial information for free, but requires a subscription to have access to historical financial data beyond 2 years from the current date.