With the ample number of online brokerage services available, choosing the right broker is a bit like sorting through Alphabet soup to find the right letters to spell your name. However, there are a few key metrics that can be used to compare between different online brokers to help you choose the one that fits your needs.
A broker is defined as a person or entity that manages assets and executes trades and transactions between a buyer and a seller of an asset. Investors who use a brokerage service pay a fee for every transaction made, or sometimes on a per month or annual basis. A broker can be an individual person/firm or it can be through an online service managed by a number of investment representatives. Typically, a full service broker is a licensed firm that provides expertise to their clients around executing trades, retirement and wealth goal planning, and portfolio management. A discount broker is a firm (hopefully licensed) that offers self directed trading and portfolio management without the added services and commissions from a full service broker. The majority of online brokerage services are discount brokerages.
So who exactly needs a broker? Well almost anyone who wishes to invest their money in the stock market over the long haul, whether self directed or not, will find themselves having to choose a suitable broker. Many individuals will choose a full service broker. This may be a better option simply because an investor lacks the knowledge, expertise, patience, and discipline to manage their own investments. Others will choose the self directed method through a discount online brokerage firm. Assuming that the majority of people are very mobile nowadays, the focus of this article will be around discount online brokers.
In order to determine which online brokerage service is best for you, it's important to understand some key criteria:
1) Transaction and Withdrawal Fees
Every online brokerage will have commissions per trade or transaction, and sometimes monthly/annual fees for having an open account. It goes without saying that the less commission paid per transaction, the better. Limit the investing expenses as much as possible to maximize returns.
2) Minimum Account Balances
Some brokerages require an investor to maintain minimum balances in their investing accounts to avoid incurring a penalty. Try to seek out a broker that does not have this kind of stipulation in place.
3) Account Types Offered
Ensure that opening up any account to invest in, such as RRSP, TFSA, or a margin/non registered account is feasible. Margin accounts can allow one to leverage themselves and borrow on margin to invest. RRSP and TFSA accounts simply offer an investor to invest and grow their investments without the immediate capital gains tax implications in RRSP, and without the inclusion of any tax in the TFSA.
4) Licensed
Make sure the broker is fully licensed and regulated in the province/state/country you reside in. This is important if the firm were to ever go bankrupt and liquidate their assets, because you would be protected and get your investing account balances back in full.
5) Investing Research Tools and Financial Data Availability
Many online brokers will have software or tools available to do fundamental and technical analysis on stocks or comparability studies between companies, as well as retrieval of financial statements that can be found on SEDAR. Such tools make it that much easier to make sound investing judgement within one's online brokerage user interface without having to pay extra for technical and financial data from another outside source.
6) Customer Service
This may be a difficult criteria to judge, unless you have already chosen the broker and find yourself needing assistance. Having a reliable customer service base is quite convenient when needing help with executing trades, discussing transaction feasibility, account balances and transfers, or new account application questions. The less headache the better.
7) Reputation
Sometimes word of mouth is all it takes to find the right online broker.
According to the Globe and Mail's 17th Annual Online Brokerage Rankings released in December 2015, the top overall grade belonged to Virtual Brokers, while Scotia iTrade won best in "Account Reporting and Maintenance, and TD Direct in "Research in Tools" (in case any of you are wondering why I didn't reference the 18th annual rankings from 2016, it's because a Globe and Mail subscription is required to see the article...). For my self directed investing, I use Credential Direct because of their efficient user interface, helpful customer service, comprehensive research tools for fundamental and technical analysis, and ease of access to company financial statements. For whatever reason, they only received a C Grade in the rankings!
Defining the best suitable online broker to the above mentioned criterion will help in choosing which service works best for you. The benefits that come along with selecting a good broker will help considerably with maximizing your investment returns along the road to financial independence. The letters in the soup should be very visible now. Choose wisely!