Best Online Stock Brokers
Based on In-Depth Reviews

It’s been nearly 11 years since the September 2008 economy collapse — a collapse that most economists consider the worst financial crisis since the Great Depression of the 1930s. According to a report by the Pew Charitable Trust, the Federal Reserve estimates that the United States lost approximately $7.4 trillion in stock wealth from July 2008 to March 2009.

Fortunately, both the economy and the stock market have since recovered, but some remain wary about investing. A 2018 survey commissioned by the FINRA Investor Education Foundation and the CFA Institute revealed that although income and debt are still a major obstacle for young Americans to start investing, lack of knowledge is also an issue.

It is a common misconception that in order to begin investing, you need to have a substantial amount of money. While it is true that most full-service brokers require large deposits for you to get started, online stock brokers pose a more affordable option, some with account minimums as low as $0.

Online Stock Brokers vs. Full-Service Brokers: What’s the Difference?

Online stock brokers, also called “discount brokers,” allow you to buy and sell securities at lower commission rates than their full-service counterparts. With an online stock broker you’ll rarely interact with an actual stock broker, as they tend to offer limited investment advice and most transactions are executed online. Some of them do have physical branches and offer broker-assisted trades that can be placed over the phone, typically for an additional fee. However, you’ll have access to other tools and resources, like intuitive trading software, asset estimators and information on current market trends, to help you start trading.

Oftentimes, people confuse online stock brokers with what’s known as “robo-advisers.” Just like online stock brokers, robo-advisers offer investment management services at a reasonable cost through a virtual platform, but their strategies are completely different.

Online stock brokers offer a hands-on investment approach, allowing you to build your own portfolio composed of stocks, bonds, options and ETFs, among other securities. Robo-advisers provide a more automated experience, where you invest through a series of algorithm-driven portfolios that are personalized according to your financial goals and risk tolerance. Some of the most popular robo-adviser firms are Betterment and Wealthfront, both of which offer diversified portfolios and automatic rebalancing.

Full-service brokers allow you to trade a wide range of securities, but rather than placing the trades yourself, a licensed stock broker does it for you. Full-service brokers also provide other resources that are typically not available through online stock brokers, such as retirement and estate planning, wealth management, financial advice and tax assistance. They also have physical branches, which helps explain their higher account minimums and fees.

Both online stock brokers and full-service brokers accommodate different financial circumstances, goals, and needs. For example, if you have a considerable amount of money, zero time to manage your account, and would like a guided experience along with other financial services, then a full-service broker might be right for you. However, if you have modest savings, don’t mind doing a considerable amount of research necessary to polish your skills, and you feel confident enough to trade on your own with little to no additional advice, then an online stock broker may be a better fit. 

Online Stock Brokers: A Closer Look

As previously stated, online stock brokers primarily conduct their business through a digital platform, which is why they require lower minimum account balances and offer more affordable trading fees than traditional brokerage firms. Regardless of how much you’re planning to invest and the company you choose, it’s important to understand some key terms and educate yourself about the different types of portfolios and investment products, as well as how they generate income.

Self-directed vs. Managed Portfolios

One of the biggest decisions you’ll make right off the bat when choosing an online stock broker is whether you want a self-directed account or a managed portfolio.

A self-directed account allows you to build your own investment portfolio and be completely in control. You choose the investment products or securities you’d like to trade (stocks, bonds, options, ETFs, etc.), the amount, and when you’d like these transactions to happen. Trades themselves are subject to market hours, but some companies do allow after-hours trading.

Self-directed accounts require lower account minimums than managed portfolios, typically ranging from $0 to $100. In addition to volume pricing, some companies also waive maintenance and other administrative fees for executing a certain amount of trades per month, making them an ideal option for frequent traders who have some market knowledge and would like a more active experience.

Managed portfolios are designed for consumers who are interested in a more passive approach. Account minimums vary greatly from one company to the next, but usually range between a couple of hundred and a few thousand dollars.  To create an investment strategy that works for you, managed portfolios take into account your financial goals, timeframe (short-term or long-term) and risk tolerance.

To maximize your earnings, online stock brokers usually offer at least three portfolios to choose from with automatic rebalancing. Some of them feature access to financial advisors or other investment professionals, along with investment tracking tools. Managed portfolios are best suited for those willing to invest a bit more and who feel more comfortable letting someone else manage their assets.

Common Investment Products

Stocks

Stocks, also known as “equities,” are issued by companies when they want to launch new products, pay off debt, expand their business into new markets, or open additional branches. Investors who purchase stocks basically own a piece of the company. In the long run, they offer higher returns than other securities— which makes them very popular— but they’re also highly volatile. A stock’s value fluctuates according to market conditions and the company’s financial performance, which is why they’re considered to be an aggressive (or high-risk) investment strategy.

Stocks can be common or preferred. Common stocks allow investors to vote at stockholder meetings and receive dividends. With preferred stocks, investors receive dividends prior to common stockholders and have higher priority in asset liquidation if the company goes under. On the downside, preferred stockholders usually don’t have voting rights at stockholder meetings. 

Common and preferred stocks can also be classified as growth, income, value and blue-chip stocks. A growth stock is one whose earnings increase at a faster rate than the market average, but usually doesn’t pay dividends. Investors commonly buy growth stocks in hopes that they’ll make money through capital appreciation, which is when an asset’s value increases. An income stock is one that pays dividends consistently. Value stocks are those whose value has fallen on the market. They can be common or preferred. Investors buy them at a discounted price, with the expectation that the market has overreacted and the stocks will regain their value. Blue-chip stocks are those belonging to big companies with a long history of consistent growth. These stocks are considered “less risky” than others, and typically pay dividends.

Bonds

Bonds are loans made to corporations or other types of organizations from the private sector, as well as to municipal, government and federal agencies. When you invest in a bond, the issuer or entity that’s borrowing the money establishes an interest rate and a maturity date.

Bonds are considered a fixed income investment, since you receive money through a series of interest payments on a fixed schedule. Additionally, if you keep the bond until its maturity date, you’ll be able to recoup your principal amount.

Because bonds are a fixed income investment, they are less volatile than cash investments like stocks, thus offering lower returns.

Mutual Funds

A mutual fund is a program created by an investment company that allows investors to purchase shares from its portfolio, composed of stocks, bonds and other commodities. Mutual funds are professionally managed and have higher costs and fees than other securities, but offer plenty of benefits. One of their main advantages is that they provide a high level of diversification, which can result in better returns.

Besides a diversified portfolio, mutual funds offer liquidity, meaning that shares can be easily sold at any time for their current net asset value, minus any redemption fees.

Some of the most popular mutual funds are equity, bond, money market and balanced funds. 

• Equity funds are those that invest primarily in company stocks. They’re considered an aggressive type of investment and have the greatest growth potential out of all the other mutual funds. 

• Bond funds invest in corporate or government debt. They’re less risky than equity mutual funds and offer lower returns. 

• Money market funds invest in short-term debt such as US Treasury bills, commercial paper and certificates of deposit. They are extremely low-risk and offer high liquidity. 

• Balanced funds, also known as “hybrid funds,” invest in both stocks and bonds. They have lower expense ratios than other mutual funds, but offer a decent amount of income and capital appreciation. 

ETFs

Just like mutual funds, exchange-traded funds (ETFs) offer investors the opportunity to purchase shares from a diversified portfolio that may contain stocks, bonds and other commodities, but their similarity stops there. Unlike mutual funds that can only be traded once a day when the market closes, ETFs can be traded throughout the day in exchanges, just like stocks. These trades are typically done by investors, not by a brokerage firm, which is one of the reasons why they’re more affordable than mutual funds.

There are many types of ETFs, but they usually fall under two main categories: index-based and actively managed. Most ETFs in the market are index-based. Index-based ETFs have lower costs than those that are actively managed. They replicate a particular market index, like the S&P 500 stock index, investing in the same securities to obtain similar returns. Rather than following an index, actively managed ETFs invest in a diversified portfolio that is managed by an investment firm. Their main goal is to outperform other market indexes to obtain better returns.

Options

Options are contracts by which the purchaser has the right—but not the obligation, to buy or sell a security, such as stocks or bonds, at a fixed price on a specified date.

Options are usually classified as call or put. A call option allows buyers to purchase shares of an underlying security at the strike price, which is the preset value established by the options owner, for a specified period of time. The strike price will determine whether you’ll make money on the transaction. A put option allows the buyer to sell shares of an underlying security at the strike price within a specified period of time.

For example, an ACME October 60 Put, allows the buyer to sell an ACME (fictional company we’re using as an example) stock at a strike price of $60 until October. Conversely, an ACME October 60 Call, allows the buyer to purchase an ACME stock at a strike price of $60 until October.

Futures

Futures are a type of financial contract where two parties agree to buy or sell a security or commodity at a fixed price on a specified date in the future. They are similar to an options contract, the main difference being that with a futures contract the investor is required to buy or sell these assets at the agreed value within its expiration date, regardless of their current market price.

Futures allow investors to speculate on the upcoming value of an asset. One of the main advantages of investing with futures is that brokers usually don’t require you to come up with the full contract amount in advance. Still, this type of product is best suited for more experienced investors or those with extensive market knowledge.

A Note on Cryptocurrencies and Other Investments

Besides the usual stocks, bonds, mutual funds, ETFs, options and futures, some online stock brokers also offer cryptocurrencies as part of their investment products. Cryptocurrency is a medium of exchange (currency) that exists in the digital world and uses encryption techniques to track its value and ownership. Cryptocurrencies first came into the scene in 2009, with the release of the bitcoin, which is still the most popular cryptocurrency to date. Other important cryptocurrencies include the ethereum, litecoin, dash and ripple.

When we asked Peter Krull, CEO and Director of Investments at Earth Equity Advisors, a company that specializes in responsible investment management, financial advisory and planning, about investing in cryptocurrencies, he told us that he doesn’t think it’s a good idea for new investors. “When you buy a cryptocurrency, you’re basically just buying something with not necessarily any underlying value. It is only worth what the market prices it at,” says Krull. Still, he believes that blockchain, which is the idea behind cryptocurrency, is going to be important moving forward. Cryptocurrencies are extremely volatile and there are no real investment strategies for them, which is why they’re not the best option for those with limited market knowledge or low-risk tolerance.

Other investment products that are considered safer and are also available at some online stock brokers are certificates of deposit, annuities and precious metals, like silver and gold.

Investment Income

Before you invest, it is crucial to understand how the different securities or investment products generate profit, so you know what to expect in terms of returns and taxation. 

Investment income is the money you earn through your assets’ increased value. This type of income primarily comes from three sources: dividends, interest payments and capital gains.

A dividend is a payment issued by a company to its shareholders, which represents a portion of its profits. Public companies usually pay them on a fixed schedule, but there are some exceptions known as “special dividends” or “extra dividends,” in which the company pays an additional amount that was unscheduled. Dividends can be paid in cash, shares, or other property. Investments like stocks, some mutual funds, and ETFs pay dividend income.

When you invest in bonds and other fixed-income investments, you’ll earn money through interest payments. An interest payment is an amount you receive on a fixed schedule for the money you’ve borrowed. Unlike dividends that are only paid to stockholders if the company makes profits, interest payments must be paid on a regular basis until the loan reaches its maturity date, whether the company makes money or not. The interest earned can be simple or compound, depending on the investment product.

Simple interest is calculated based on the principal loan amount, while compound interest is calculated using the principal loan amount, plus any accrued interest. Regardless of which type of interest you earn, interest payments are considered safer than dividends, since they don’t rely on the company’s financial performance. However, they tend to offer lower returns.

Capital gains are the profits made from selling an asset at a greater value than its original purchase price. For example, if you purchased an AMZN stock at $60 and sell it a year later at $70, that means that you obtained a capital gain of $10. In addition to stocks, funds and bonds are also associated with the production of capital gains.

Regulations

The Financial Industry Regulatory Authority (FINRA), which is the non-profit private corporation responsible for protecting U.S. investors against unfair and dishonest practices by regulating brokerage firms and exchange markets, defines a broker-dealer as any person or company that is in the business of buying and selling securities on behalf of its customers, for its own account, or both.

Online stock brokers allow investors to purchase and sell securities through their virtual platforms, meaning that they’re considered broker-dealers by FINRA’s standards. Just like any traditional brokerage firm, online stock brokers should be members of FINRA as well as be registered with the U.S. Securities and Exchange Commission (SEC), in order to conduct business.

The SEC is the federal agency that enforces federal securities laws and regulates the securities industry, including electronic markets. It also oversees FINRA. It was created in 1934 to restore the public’s confidence in the U.S. markets after the crash of 1929. Its primary mission is to protect investors, maintain efficient markets, and facilitate capital formation.

Besides being members of FINRA and being registered with the SEC, online stock brokers should also be members of the Securities Investor Protection Corporation (SIPC). The SIPC is a federally mandated, non-profit corporation that protects investors in the United States against the loss of cash and securities up to $500,000, with a limit of $250,000 for cash.

It should be noted that the SIPC does not protect investors against losses caused by the decline in value of their securities, against losses caused by bad investment advice, or if they purchase worthless stocks or other securities. The SIPC’s insurance is designed to protect investors in case their brokerage firm fails, even if the investor is not a U.S. citizen.

Before choosing an online stock broker, it’s important to check the company’s standing with each of these entities. You can check it by visiting FINRA BrokerCheck, where you can simply enter the name of the firm and search for its current registration status, and for any regulatory actions or arbitrations filed against it. You can also find out more information about the brokerage firm by contacting your state’s securities regulator. You can find your state’s securities regulator by visiting the North American Securities Administrators Association’s website.

Should You Invest?

Investing wisely can serve as a tool to help you build wealth faster and achieve short-term goals like a big purchase, as well as long-term goals like saving enough to retire comfortably, or even retire early.

One thing to keep in mind, according to Emmanuel Dávila Martínez, former investment officer, is that “at the end of the day, when you invest, you’re assuming a risk. You can minimize that risk by educating yourself, but there’s always a chance you might lose money.”

Things to Consider

Once you’ve come to terms with the fact that you might gain or lose money by investing, there are a few things you should take into account prior to opening a brokerage account, mainly your financial situation, market knowledge, and risk tolerance.

Your Finances

The first thing you should assess are your finances. If you have substantial debt and little savings, then the best thing would be to wait until you’ve managed to get that debt under control and have a rainy-day fund before you start investing. 

Krull told us that, ideally, individuals should be “saving more than they’re spending or making more than they’re spending,” before they invest. In other words, you need to invest money that is not compromised in any way, shape, or form.

Your Market Knowledge

While some online stock brokers do offer access to actual brokers and other financial professionals, this is not the norm and it usually comes at a price. Investing through a self-directed account is cheaper than using a managed portfolio, but that also means that you’re basically on your own. 

If you’re confident enough about your trading skills or are willing to put in the time and effort to learn about investment strategies, then a self-directed account might be right for you. If you feel more comfortable letting someone else design a strategy for you, or if you don’t have the time to do the research on your own and would like a bit more hand-holding, then a managed portfolio might be your best option.

Risk Tolerance

When it comes to investing, risk tolerance is defined as your willingness to lose money in hopes of getting a better result. Having a high risk tolerance means that you’re willing to invest in securities that are more volatile, like stocks, at the risk of losing your initial investment, to obtain a higher profit. Having low risk tolerance means that you prefer to invest in safer or more conservative securities, like bonds, even if that means obtaining lower returns, in order to keep your initial investment.

Younger individuals tend to have a higher risk tolerance than those that are closer to the age of retirement. Examining your risk tolerance, should be one of your primary considerations before investing, since it will help you determine the types of securities you’d like to trade.

What You’ll Need to Get Started

As previously discussed, online stock brokers must adhere to some rules and regulations, just like traditional brokerage firms. Part of this is obtaining certain information prior to opening an account to avoid any future liabilities. Some companies may ask for more details than others, but the standard information you’ll be required to provide is:

• Your full name

• Address (both physical and postal)

• Phone number

• Email

• Date of birth

• Social security number or taxpayer identification number

• A copy of a government-issued ID, such as your driver’s license or passport

• Employment information

• Annual income

• Bank account information (particularly if you’d like to fund your account through direct deposit)

• Brokerage account information (if you’re transferring an account from another firm)

In addition to these details, most companies will also ask you what your investment goals are and your desired risk tolerance to determine the best type of account for you.