The Best Online Stock Broker

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The Best Online Stock Broker: Testing the Waters To Help You Find the Top Online Brokerage Firms

By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Monday, September 16, 2002: Issue #171

My online broker is Charles Schwab.

Schwab’s service has always been excellent, in my case. They’ve never given me a reason to switch.

In doing my homework for this article, I’ve still found no reason for me to switch. However, there may be a better broker out there for you and you might just find it online. So let’s take a look at the positives – and negatives – for each of the major online brokers so you can decide which will be the best online stock broker for your particular needs.

The Highest-Rated Online Stock Brokers

The “across the board winners” of all the in-depth tests of online brokers are:

Schwab
E*Trade
Harris Direct
Fidelity

If the level of quality at Schwab is any indication of the level of quality at the others, you really should be fine with any of these. However, these firms are generally pretty decent at everything – which means they may not be very good at what you’re looking for, if you’re looking for something specific.

For example, Schwab isn’t the cheapest. Nor is it the fastest in trade executions.It is a great value for what you get in my opinion. But if you’re looking for “no-frills” trading, or if you’re a “hyper-trader,” then Schwab isn’t for you.

When “No-Frills” Online Brokers Can Cost You Money

A word of caution: Watch out when it comes to no-frills. You will pay less in commissions at a super-cheap broker. But you could very well end up paying substantially more. For example, on an order of $5,000, you’ll pay eight bucks in commissions at Ameritrade versus $30 at Schwab. At first glance, it looks like you’re paying $22 more at Schwab. But that doesn’t include the quality of the trade execution

Let’s say that Schwab, with high-quality trade executions (it ranked higher than the other three big winners), saved you 1% on the price of the stock versus Ameritrade. That’s a $50 savings on a $5,000 order. Ameritrade’s trade executions received low marks in the Barron’s survey, a pretty intensive survey. So instead of saving $22 in commissions at Ameritrade, due to a low -quality trade execution you would have lost more in “total” trade costs than you made in the commission difference. So don’t consider the commission cost as your only consideration – because quite frankly, they’re all pretty low. Good execution is more important – especially if you’re a “hyper-trader.”

Personally, I’m not a stock “hyper-trader.” So I can’t comment from personal experience here. However, in Barron’s survey of online brokers, Terra Nova (www.terranovaonline.com) had the best trade executions (beating Schwab) and it had lower trading costs. Isn’t that the Holy Grail? The thing is, it’s really not for the average investor…

Terra Nova is not a “one-stop broker shop” with “life-planning tools” and things of that nature. On the contrary, it’s a hard-core trader’s site. Barron’s says it’s not easy to use. It’s a direct-access trading platform, and you’ll really have to invest some time to learn how to use it. For the less-technical “hyper-trader,” E*Trade scored high in all tests, and it’s not rocket science to use.

The Best Brokers on the Web For “One-stop Shoppers”

Many of us are “one-stop shoppers” looking to do as much of our retirement investing as we can in one place. For folks like us, Schwab and Fidelity are the best choices, consistently at the top of all categories. The range of services is unbelievable.

If you get frustrated online, E*Trade, Schwab, Fidelity, and Harris Direct (the usual suspects) got the highest marks in the “Ease of Use” category, according to www.gomez.com. Barron’s basically agreed.

I could go on here, but the clear-cut winners are these four. What more can I say? If you’re looking to go online, or you’re not happy with your existing online broker, try one of these.

I can personally attest that the quality of the experience across the board at Schwab is extremely high. Of course, I’m not talking about the online experience only I’m talking about the whole Schwab experience – the walk-in experience, the phone experience, and the online experience. Because to me, that’s what’s important – the total package. Based on the surveys, the other three firms should be pretty close. Best of luck to you.

Good investing,

Steve

Today’s Investment U Crib Sheet

There are a number of factors to consider when selecting an online broker: ease of use, good trade execution, cost of doing business, etc. So when considering an online broker to go with, be sure you do so with your own situation in minddon’t just blindly follow the overall recommendations made in any publication. And – keep in mind that low commissions doesn’t always mean that you’ll pay less.
For those of you who already trade online, I would encourage you to share your knowledge of online brokers with your fellow Investment U readers on the IU Message Board.