This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Online stock brokers have evolved from simple execution venues into full-service platforms, and the modern broker offers a wide range of products, tools, and services. The trader who understands the components can pick a broker that matches the trader's needs.
Security: the foundation
The first component is security, and the security is the foundation of the trading relationship. The trader deposits the funds with the broker, and the trader relies on the broker to keep the funds safe. The security has several layers, and the trader should evaluate each layer.
The first layer is the regulation. The broker should be regulated in a tier-1 jurisdiction, and the broker should keep the client funds in a segregated account at a tier-1 bank. The regulation ensures the broker follows the rules, and the segregation ensures the trader's funds are not used for the broker's own operations.
The second layer is the cybersecurity. The broker should use encryption, two-factor authentication, and other security measures to protect the trader's account. The trader should look for a broker with a strong security record, and the trader should look for a broker that has not suffered a major data breach.
The third layer is the insurance. The investor compensation scheme covers losses up to a certain amount if the broker goes bankrupt, and the coverage varies by jurisdiction. The trader should check the coverage in the trader's jurisdiction, and the trader should consider the coverage when picking a broker.
Options: the range of products
The second component is the range of products, and the range determines what the trader can trade on the platform. The trader who wants to trade a specific product should check the broker's offering, and the trader should look for a broker that offers the products the trader wants to trade.
The most common products are stocks, ETFs, options, futures, forex, and CFDs. The broker who offers all six is a multi-asset broker, and the multi-asset broker is suitable for traders who want to trade multiple asset classes. The broker who offers a subset is a specialist broker, and the specialist broker is suitable for traders who specialize in one asset class.
The trader should also check the markets. The broker who offers US stocks is suitable for traders who want US exposure, and the broker who offers international stocks is suitable for traders who want global exposure. The trader should pick a broker that offers the markets the trader wants to access.
Research: the analysis tools
The third component is the research, and the research helps the trader make better decisions. The research can be analyst reports, market commentary, trading ideas, or news. The research can be free, or the research can be a paid add-on.
The trader who values research should pick a broker with a strong research offering, and the trader who does not need research can pick a broker with a basic research offering. The trader should compare the research across brokers, and the trader should look for a broker that publishes research on the markets the trader wants to trade.
The research can also include trading tools, like screeners, charting, and backtesting. The trader who uses technical analysis should pick a broker with advanced charting, and the trader who uses fundamental analysis should pick a broker with strong fundamental data.
Support: the lifeline
The fourth component is the support, and the support is the trader's lifeline when something goes wrong. The support can be email, chat, phone, or in-person. The support should be responsive, and the support should be knowledgeable.
The trader should test the support before opening the account, and the trader should look for a broker with a strong support reputation. The trader can test the support by sending a question, and the trader can evaluate the response time, the quality of the answer, and the courtesy of the support agent.
The support can also include educational resources, like tutorials and webinars. The trader who is new to trading should pick a broker with a strong educational offering.
Cost: the bottom line
The fifth component is the cost, and the cost is the bottom line. The cost includes the commission, the spread, the platform fee, the inactivity fee, and the currency conversion fee. The trader should calculate the total cost for a representative trading pattern, and the trader should compare the total cost across three to five brokers.
The cost is not just the commission. A broker with a low commission may have a wide spread, and the broker may charge a platform fee. The total cost is the sum of all the fees, and the total cost is the most accurate measure of the cost.
The trader should also consider the value. A broker with a high cost may offer a service the trader values, like research, advice, or a premium platform. The value can justify the higher cost, and the value can make the broker a better choice than a cheaper alternative.
How the components connect
The components are not independent. The broker who offers strong security may charge a higher fee, and the broker who offers a wide range of products may have a more complex platform. The trader who values one component may have to accept a trade-off in another component.
The trader should rank the components by personal priority, and the trader should pick the broker that offers the best combination. The trader who values security should pick a broker regulated in a tier-1 jurisdiction, and the trader who values cost should pick a discount broker with a low total cost.
Common questions about online stock brokers
Are online stock brokers safe? Yes, when the broker is regulated, when the broker segregates the client funds, and when the broker has a strong cybersecurity record. The trader should verify the three points before opening the account.
Do I need a broker with research? It depends on the trader's experience and the trader's strategy. The trader who uses technical analysis may not need research, and the trader who uses fundamental analysis can benefit from research.
What is the best broker for cost-conscious traders? The best broker for cost-conscious traders is a discount broker with zero commission on stocks and ETFs, and a tight spread on the other products. The trader should compare the total cost, and the trader should not rely on the commission alone.
Related resources
Where to start
If you are evaluating online stock brokers, the most useful first step is to rank the five components by personal priority, and to shortlist three to five brokers that match the top two priorities. Our broker comparison lists the brokers by regulation, cost, product range, and platform, which together tell you what the broker offers before you open the account.