Discount Brokers or Full-Service Brokers: Which is Right For You?

Discount brokers provide trading executions at rock-bottom prices. That is the key benefit they offer.

Discount brokers do not offer the same level of customer service or the same number of products that full-service brokers do, but discount brokers do offer all of the tools and services you need to place trades as an individual investor. If you feel comfortable conducting your own stock analysis and placing your own trades, you may want to consider using a discount broker.

[VIDEO] Discount Brokers

Now that you’ve got the basics of what a discount broker is, check out the video above and see what else you can learn about discount brokers at the whiteboard.

Full Service Brokers

Full-service stock brokers, as their name suggests, provide a full range of products and services to their clients. Typically when you are working with a full-service broker, you will work with an individual who personally oversees your account and is responsible for taking care of your needs.

[VIDEO] Full-Service Brokers

Video pending…

A full-service broker can provide services, such as:

  • Trade execution
  • Stock selection advice
  • Retirement advice
  • Insurance

In return for providing extensive, hands-on service, a full-service broker typically charges higher commissions.

Now that you’ve got the basics of what a full-service broker is, check out the video above ¬†and see what else you can learn about full-service brokers at the whiteboard.


Image courtesy


How to Create a U.S.-Based Brokerage Account Even if You Don’t Live There

International stock and options traders outside the United States are a fast growing segment of the investor population. The steady release of new products like forex, commodity ETFs and currency options trading on U.S. exchanges have even more international traders looking to access the U.S. markets.

[VIDEO] How to Create a U.S.-Based Brokerage Account

Learning Markets has a large international readership and a question we get frequently is how to set up a brokerage account inside the U.S. if you don’t live there. Because a U.S. based account may be the most efficient and cheapest way to access the U.S. exchanges we feel that this is an important question.

Setting up a stock or options brokerage account is a subject we have discussed before and there are very few changes that a trader from outside the U.S. needs to worry about.

The biggest issue is usually that it may take a little extra time to establish the account than if you were setting one up from inside the U.S. The list below should help you understand what you will need to do to get started.

Account Application

The account application is a long form that all account holders have to fill out. It includes contact information, trading objectives questions and disclosures. Most discount brokers in the U.S. allow you to fill this application out online and even sign it electronically.

However, applicants from outside the U.S. must send, scan or fax in a hard copy. This is annoying but not a big issue.

IRS Form W8

This is a form the broker will get from you and return to the Internal Revenue Service, which is the tax collection arm of the U.S. Treasury.

The form identifies you as a foreign person and usually has to be returned to the broker in hard copy. Its about a page long but usually only takes a few minutes to fill out.

Call Your Prospective Broker(s)

If you are considering opening an account with a broker inside the U.S. make sure you are calling or contacting their customer service departments about the process before filling out the application. This accomplishes several things at once.

  1. You will find out whether they accept international accounts – not all brokers do.
  2. Customer service can explain what the process and commissions are like for international accounts. For some brokers, setting up an account is easy and for others it can be long and difficult. There is no need to increase your work load unduly.
  3. Contacting the brokerage service department is always a good idea regardless of where you are located. This will give you a taste for what working with the broker will be like. Were they courteous, knowledgeable, responsive…? Did they provide the ability to chat online rather than a phone call if you prefer that method?

These are all things you will find out and it will make a big difference if you ever have issues in the future.


If you were a resident or citizen of the United States you would get a 1099 form at the end of the year with your profits or losses from your broker. Most firms use an outside processor to send this form out and they usually don’t differentiate between domestic and foreign account holders. If you are outside the U.S. this form may not apply to you and you will want to discuss it with a local tax adviser.

The bottom line is that the process of setting up a brokerage account inside the U.S. is usually no more difficult than if you were inside the U.S. It just may take a little extra time to print and then fax, scan or ship your documents to the broker.


Image courtesy Sam Churchill.

Broker Review: TradeMONSTER

Formed in mid 2007, tradeMONSTER is owned by optionMONSTER, a for-pay trade advisory and stock picking service. The parent firm is affiliated with popular market commentators Jon and Pete Najarian, who many active traders may be familiar with from CNBC and the CBOE’s website. The web-based trading platform was the best we reviewed and includes lots of tools and a clear pricing structure.


Who Is The Broker Targeting?

TradeMONSTER is targeting the active options and stock trader. The product line offered is generic but complete for this kind of trader and pricing is relatively straight forward. Commissions are on the low end for this kind of broker but they are not the lowest and are graduated as you go up in volume.

TradeMONSTER is going to be most attractive to traders looking for lots of useful tools and a very tight trading platform. If you are trading a lot of option spreads and want to have very easy access to simple but robust analytics and an integrated tool set this is a broker worth checking out.

Ease of Use:

The trading interface is web-based but still very fast and easy to use. Once the platform is loaded moving from one page/feature/tool to the next was very easy. It was almost like working on a software-based platform. Like a lot of web-based applications, you will have a better experience with a fast internet connection and an updated browser.

TradeMONSTER has done a fantastic job integrating a robust tool set with the platform. Risk graphs, greeks, price charts, volatility charts and many other important tools for option traders are all within a click or two of the option chain sheet or stock you are evaluating. The tools are totally integrated with the platform so trading from the charts, chainsheet or quotes page is easy and quick.

Unlike many brokers in this space, who are on a quest to bolt on an endless series of tools and gadgets to their platform the tradeMONSTER tool set is actually quite useful. Assuming you have at least some experience in the options market the tools won’t overwhelm you and you will not need to take a course in options pricing theory to use them.

Order entry is very straightforward and extremely intuitive. The platform can be customized to a limited extent and option chain sheets can be set to display the expirations, strikes and spreads you want to see quickly.

Account tracking and analysis is one of the things that stood out to us during our test period with tradeMONSTER. This is almost always an overlooked feature with online brokers who typically put a web version of a current account statement online. Being able to chart your equity curve, evaluate your net exposure and glance at your profit/loss, positions and margin status in one easy to access location was great.

Costs and Commissions:

TradeMONSTER has competitive commissions and the structure was relatively straight forward. Costs do go up in absolute dollar terms with larger options trades but the costs per contract drop a little after meeting minimum commission levels. Overall, tradeMONSTER had slightly below average commissions and costs compared to other brokers in this space. The commissions for stock trades are flat, which we liked a lot.

Like most brokers we suggest that you ignore the published rates and call them to walk through your actual trading behavior. Doing this with each of the brokers you are evaluating will give you an much better idea of what your trading costs will actually be.

Pros and Cons:

TradeMONSTER has a very tight trading application. Everything is easy to find, totally integrated and is actually fairly useful. The commission structure was good and easy to understand. The company has a reputation with active options traders and their service department/trading desk was excellent. We always got a good answer when we called and were able to reach someone within a few seconds.

The TradeMONSTER platform is easy to use and powerful but if you don’t have some experience in the options market you will probably get a little lost. Unfortunately we feel that tradeMONSTER does a poor job at platform and market education. This was a surprise to us considering the relationship with optionMONSTER. The webinars and pdf

Like just about every broker specializing in the active options trader market, service was good and competent but they were not very friendly on the phone. I think this is one of the trade-offs you make when you hire people with solid market experience. They know what they are talking about (which is good) but they sometimes intimidate more junior traders looking for help.


Overall, tradeMONSTER earned a place on our recommended broker list. They are a good alternative for a trader working exclusively in stocks and options or an investor looking for a good broker to trade a portion of their portfolio dedicated to options strategies. Order execution was reliable, the platform was solid and fast and the tools and service were useful and comprehensive.

Is Your Broker Your Biggest Risk?

The government insures most bank deposits but what about your brokerage account? Are those funds protected?

Recently the FDIC, in conjunction with marketing-maven Suze Orman, launched a PR website to help bank depositors understand what accounts and amounts are covered by the FDIC and what aren’t. The case studies on the website are a little absurd considering the fact that the families profiled all have more than a million dollars in assets on deposit (less than 1% of the U.S. population fits that demographic) but it raises some good questions.

[VIDEO] Is Your Brokers Your Biggest Risk?

– Are investors covered in similar ways?
– Is it important to be covered as an investor?

Being a trader or investor in any market comes with risks. Most of these risks are market related. Maybe the market will move in your favor and maybe it won’t. That seems relatively straight forward but have you considered some of the systemic risks not associated with market movement?

If your broker, dealer or advisor fails, it could destroy all, most or some of the profits and deposits you have made over many years. If this only happened once in your lifetime it would be enough to change your financial status forever.

Investors in CDs or bank deposits have some coverage (usually up to $100,000 per account holder per FDIC covered bank) but do trading account holders have similar coverage benefits? Yes and no. Finding out whether or not you are covered is important and definitely relevant in today’s unstable economic environment.

Stocks and Options Accounts:

Traditional brokerage accounts are usually covered in two ways. First, your broker may offer a sweep account that will qualify for coverage by the FDIC (like Suze Orman’s examples) and your positions and remaining balances are usually covered by the SIPC (another Federal insurance agency) up to $500K.

If your broker were to fail, your account positions and balances would be transferred to another clearing firm. The process takes some time but ultimately you can anticipate getting your money back. The SIPC has done this 317 times and a little over 99% of investors involved have been paid what they were owed.

Exchange Traded Futures Accounts:

If you own a futures account, things get a little more complicated but not by much. Your futures account is actually separated and designated to your sole benefit. This means it cannot be attacked in a bankruptcy or receivership process. Ultimately, the account and your open positions are transferred to another clearing firm where you can access it. Recently this happened to the futures account holders at Refco. There is no upper limit on how much you can have in your account for this kind of coverage.

Why does this matter?

If you have a single uncovered account or partially uncovered account and your broker or dealer fails it doesn’t matter how profitable you have been – its gone. Over the last year we have learned that no bank or financial institution can be considered immune to sudden and catastrophic failure. There have been 57 bank failures in the U.S. over the last 12 months; Marque names like Lehman, Bear and Citigroup have lost all or most of their value and Standard and Poors has lost their rating credibility. This is a new market and nothing should be taken for granted.

Your homework is to call and annoy your brokers and/or dealer and find out exactly how you are covered and what you need to do to improve that coverage. Don’t get burned by ignorance. Take action now to make sure your exposure is reduced.

How to Move Your Brokerage Account

Transferring a brokerage account seems a little intimidating to many investors. But if you are in an unhappy brokerage relationship don’t let the paper-work scare you. Dump your broker and educate yourself on how easy the transfer process can be and what you should ask for to make it as inexpensive as possible.

There are a lot of reasons to leave one broker for another. You may be able to get a much better deal somewhere else with commissions; perhaps you are unhappy with the services or tools your broker offers or you may want access to a broader product line of options, bonds, futures and forex. Whatever your reasons for leaving, its easy to get it done if you know the right questions to ask.

There are two general ways to transfer one account to another broker. If your current account is all in cash you will probably have an easier time with a check or wire transfer. However, if you have open positions and don’t want to close them it gets a little (but not much) more complicated.

Securities brokers have a process called ACATS (Automated Customer Account Transfer Service) that is managed by the NSCC (National Securities Clearing Corporation) for moving open positions and cash from one broker to another. An ACATS transfer essentially takes your account from one broker and replicates it, including your open positions, with another broker. Here are a few tips to make this process as pain-free as possible.

1. Let your new broker handle it

The ACATS process can be initiated by your new broker. They want your business and are motivated to make sure the transfer is done quickly and smoothly. Typically, your new broker will ask you to fill out a transfer form with the details about your old account. That form may be online or one they will ask you to fax back to them. It authorizes them to initiate the transfer without you having to talk to anyone at the old firm.

2. The new account must be a mirror image of the old one

It is important to make sure your new account looks exactly like the old one. That means that if it is a joint account your old account must be a joint account. If you used your middle initial in the title of your old account you will need to use that middle initial again. If you had an IRA in the new account you must use the same type of IRA in the new account. Essentially you are trying to create a mirror image of your old account with your new broker. Learn more about the differences between IRA types here.

3. The transfer process can take several days

Keep in mind that the ACATS process can take several days and it is not uncommon (although they won’t admit it) for your old broker to drag their feet a little. During the transfer process you will have limited or no access to your open positions. For long term traders this is probably not a big deal but short term traders may want to make sure they have appropriate risk coverage or have exited open positions.

4. Your old broker will charge you for this service

To add insult to injury your old broker can charge you for initiating an ACATS process. Most of the time this fee is between $50-$100 per account. However, this may not be an issue at all. Keep in mind that your new broker wants your business. It is very likely that they will reimburse you for this expense but you have to ask for it. Don’t hesitate to find out whether they will cover these costs for you.

5. If you only have cash in your old account it is quicker to just ask for check or wire

Because the ACATS transfer process takes several days it may be easier to just ask for a check or wire to be send to your new account. The ACATS process really designed for an account with open positions that you don’t want to close.

It is always useful to remember who works for whom when you are working with your broker(s). Don’t be afraid to ask for things and to talk to your broker often. Use your new broker to take the pain and frustration out of the account transfer process and get on with your investing life.

Building a Diversified, Low-Cost, High-Performance ETF Portfolio

In this article you will learn how to build a diversified portfolio of multiple asset classes without having to pay a manager

The stock indexes including the S&P 500 and the Dow Jones Industrial Average have been rising in 2009 but does this mean investors should be all in stock? According to the most recent ‘Survey of Consumer Finances’ that is what almost all investors have done, however, a few exceptions to that trend.

The top 10% wealthiest Americans have continued to own stock but have also increased their holdings in bonds and income investments. The other 90% have moved out of bonds so completely it no longer registers on the survey. Is one population better off for the choices they have made to diversify or concentrate?

Video: Part One of Building a Diversified Portfolio

What adds more interest to this phenomenon is that over the recent survey period the top 10% wealthiest investors have seen an increase of 100% to their portfolios prior to the most recent crash.

The gains for the other 90% were barely a third of that. This is not a coincidence. Despite the marketing hype and the excitement around the earnings-game there is a reason to be invested in more than just stocks.

Asset allocation and portfolio management are difficult subjects for many investors. This is due in equal parts to the fact that there is a lack of consensus among professionals as to the best way to approach these problems and the issues can be complicated.

These complications can be both cognitive (asset allocation requires a learning process) and emotional (greed often conspires against rational investing). However, there are ways to both simplify the issues and to make it achievable for even very small investors to begin understanding and applying the key concepts behind portfolio management.

In this article series I will introduce the basic concepts of asset allocation through a three step process. You will learn these basic principles.

1. Determining allocation percentages
2. Investing in individual securities (stocks, bonds, futures, etc.) or funds (mutual funds or ETFs)
3. Making adjustments and rebalancing a portfolio

Lets start with determining allocation percentages. Most investment professionals will agree that a blend of asset classes within your portfolio is a good thing but how large those allocations are is a much more cloudy issue. There are basically two factors that you have to consider when deciding on your own allocation strategy.

– How much of a bear market burden can you handle
– What kind of future returns do you want

These two factors are difficult to reconcile. Higher return assets like stocks are often accompanied by very large and unexpected corrections to the downside leading to a large bear market burden. While investment grade and government bonds have a great deal of capital protection they offer low long term returns.

Here is a good example of how two hypothetical allocations acted during different market conditions.

1. An 80/20% mix of stocks to bonds lost -34% in the bear market of 2000-20002 and lost -54% in the bear market of 2008-2009 (so far)
2. A 20/80% mix of stocks to bonds gained 7% in the bear market of 2000-2002 and gained 14% in the bear market of 2008-2009 (so far)

When looked at during these periods the bear market burden seems to bias investors towards a more conservative bond portfolio. However, over longer periods of time that include bull markets, the higher risk portfolio will outperform the lower risk portfolio including inflation by a ratio of 2:1. Finding the right mix for you is the real challenge within asset allocation.

In the video above, I look at how to start solving this problem so that you can refine your allocation yourself. You will learn thatn there are more than two asset classes to choose from, and the more uncorrelated asset classes you include the better your diversification will be. You will also learn why considering your age and retirement horizon will give you some insight into how heavily you invest in riskier assets like equities. I will start this video series by creating a fairly general asset allocation strategy that we can refine as we progress.

Part 2: Investing across asset classes is as important as diversifying within an asset class

Asset allocation does not have to be complicated. Current market products and cost structures make self-management and asset class diversification more achievable than ever before. In part two of this article I will walk through the decision-process between utilizing individual securities to achieve asset class diversification or ETFs and indexed mutual funds.

You will find that while both options are perfectly reasonable, small investors often lean towards ETFs and funds, and in the video I will explain why.

Video: Part Two of Building a Diversified Portfolio

Diversification is a multi-layered issue. There is horizontal diversification across asset classes and another layer of vertical diversification within each asset class. For example, investing in just a single stock will not optimize the benefits of diversification in the same way investing in 12-40 stocks will. Within each asset class you will have to spread your risk across more than one security and this can be difficult for small investors.

Doing this one stock at a time has one major disadvantage – costs. Buying 12-40 individual stocks is certainly possible but commission costs may become prohibitive. For small traders this issue is exacerbated because commissions, which are usually fixed, are a larger percentage of the total investment.

Alternatively, a low cost ETF or indexed mutual fund can provide exposure to many stocks within a single investment and only one commission needs to be paid. In fact, it is possible for an individual investor to use indexed mutual funds to execute a portfolio strategy like we have described and potentially pay no commissions.

The other issue that investors will need to deal with is access. For example, in the portfolio I have constructing within this article series I included commodities as one of the asset classes to increase its diversification, however, when investors think about commodities they think about the futures market. Investing in futures requires a futures margin account, which comes with its own costs and margin requirements that may be prohibitive to small and mid-size investors.

Fortunately investing in commodities, bonds, stocks and real estate can all be done through ETFs or indexed mutual funds. This reduces trading costs, increases sizing flexibility and makes it possible for individual investors to access several asset classes within a single account.

ETFs and indexed mutual funds always come with some costs but these are usually much more reasonable when compared to the convenience and benefits. They are also usually much less expensive that traditional managed funds. In the game of investing, controlling costs is a major priority.

Part 3: Learn how and when to rebalance a diversified portfolio.

With modern financial products even small investors can diversify across several asset classes. However, once achieved do these allocations need to be adjusted? If adjustments are needed how and when is that done? This part of the article will answer those questions.

Video: Part Three of Building a Diversified Portfolio

Some of the most important things to remember from this series of articles is that successful portfolio management relies on simplified processes and low costs. In the last section that meant that most individual investors should have a bias towards funds and ETFs. In this article the same principle applies to keeping allocation adjustments to a minimum.

Adjusting allocations within your portfolio carelessly is a great way to increase trading costs and may lead to over trading. However, some adjustments are usually necessary once asset values have drifted away from the percentage allocations you originally setup.

There are two general ways to approach adjustments. Some traders will reallocate or rebalance their portfolios tactically while others will adjust more passively.

Tactical Reallocation:
Imagine that you have spread your investments evenly across 5 asset classes including stocks and bonds. Assume that a year from now stocks have performed very well and have risen from 20% of your portfolio to 30% while bonds have dropped from 20% to 10%.

A tactical manager may decide that stocks are likely to continue doing well and that even more money should be reallocated to that class. At the same time a tactical manager may decide to reduce their exposure to commodities that that they have decided will become more risky in the near term.

The new asset allocation structure for a tactical manager is based on forecasts and analysis and may continue to change in the future. Often this kind of management is often called “market timing.”

Passive Reallocation:
As a passive manager you are more interested in trying to maintain your desired exposure levels across asset classes than forecasting the future. That means that in the example above you may wish to increase your exposure to bonds while reducing the stocks component to bring the original allocation back to desired levels.

Passive managers typically reallocate based on a calendar date (every 6 or 12 months for example) or based on investing objectives. A passive manager may reallocate assets if their lifestyle or objectives change or on a regularly scheduled plan. This keeps things very simple and prevents over trading.

The principles presented here are not complicated but they can be very powerful over the long term. They can help reduce major portfolio shocks while producing significant returns. From here we will begin working through the practical issues of asset class diversification. You will learn more about how to decide what percentages are appropriate for you, how to find individual investment ideas and what brokerage services are needed.

Part 4: Diversification is easier than you thought and you can do it without a manager

In the first and second sections of this article I glossed over the percentage allocation problem with a fairly generic allocation of 20% per asset class across 5 classes. If you take a closer look, you will see that the portfolio was evenly allocated across risk categories as well. There are a lot of complicated ways to allocate assets and for determining how they should change over time, but it really doesn’t have to be more complicated than that.

Video: Part Four of Building a Diversified Portfolio

For example, a classic rule of thumb is to allocate the same percentage of your assets as your age to conservative investments like bonds and the remainder to riskier assets like stocks. If you are 35 now that means you should have 35% in bonds and the rest in stocks. Similarly, once you reach age 65, you should have 65% in bonds and the rest in stocks.

However, if you think about this strategy for a minute you will find that over those years you were, on average, allocating 50% to bonds and 50% to stocks. You could accomplish the same objective without a lot of age-based rebalancing by just allocating this way in the first place and then remaining consistently balanced.

The point behind this example is to show that you don’t need to get too fancy with your allocation strategy. Find a balance that suits your risk tolerance and stick with it. If your life style changes and your risk tolerance changes with it – then make changes. Over thinking the portfolio percentages problem doesn’t ultimately do very much for you.

Finding Investments
In this series we emphasized the benefits of ETFs or indexed mutual funds as a very low cost alternative to individual securities, futures and bonds. However, this still leaves a pretty large pool of choices available.

Broker Issues
This is where many traders make mistakes. Some brokers specialize in attracting the active investor and may penalize low activity accounts with fees or low/no interest payments on cash reserve balances. Alternatively, many brokers specializing in longer term accounts may charge large commissions up front.

Take some time when evaluating your broker or potential brokers by asking them to quote commissions, fees and interest on cash balances based on your portfolio strategy rather than based on their published rates. Published broker rates can be very biased and difficult to understand within the context of your portfolio needs.

There is an investing adage that says; “your life should be interesting and your investing should be boring.” To a certain extent we feel that is true although we think “boring” should be replaced with “simple.” Modern financial products like ETFs and online brokers have put the tools of the professional in the hands of the consumer investor. Get a little education and you can be on your way to becoming a successful portfolio manager.

Part 5: How to use strategic diversification to increase your profitability

In this article we have discussed a simple but effective way to build a portfolio of diversified assets across different classes and instruments. If you want to stop there that is fine and you could easily become a very effective investment manager.

Or you can move on from here and start learning how to implement investing strategies designed to continue reducing account volatility and increase profits. This article will introduce you to the topic of strategic diversification and give you a starting place to begin learning about options strategies.

Video: Part Five of Building a Diversified Portfolio

Diversification is the only free lunch in the market because it comes with benefits and no disadvantages. However, many traders have no idea what diversification actually is or how to maximize its benefits.

As we have discussed in this series, there is more to a diversified portfolio than just a large pool of stocks, and I think it is easiest to think about diversification in three layers;

1. Horizontal Diversification spreads investment capital across several asset classes. An investor using horizontal diversification may have market exposure to stocks, bonds, currencies, treasuries or other asset classes at the same time. Within each of those asset classes, a prudent investor could use vertical diversification to maximize their benefits.

2. Vertical Diversification is what you are doing when you invest money allocated to the stocks asset class across several industry groups or within an indexed ETFs like SPY, IWM or DIA. This helps limit your exposure to unknown disruptions within individual stocks.

3. Strategic Diversification is a way to think about using more than just “long” positions to invest in the market. For example, option investors will sell calls against a long position to reduce account volatility. Stock traders using this strategy call it a “covered call.”

Over the long term, reducing volatility in this way can be shown to increase returns and reduce risk, but this is just an example starting place when beginning to diversify across strategies.

Strategic diversification is the answer to “what’s next?” when thinking about building a diversified portfolio. Many traders start with covered calls and similar strategies and begin building on that knowledge to create a management plan that improves their ability to achieve better returns with less risk than they could have otherwise. Learning Markets exists to help you understand the strategic options available and to help you implement them.

How To Choose a New Broker

Choosing a broker is more than a function of the lowest commission. There are several other factors to consider which will vary in importance depending on who you are and how you invest. This article will discuss those issues including some steps you can take to make sure you are putting your prospective broker(s) to the test.

[VIDEO] How To Choose a New Broker


At Learning Markets we interact with thousands of individual investors. Surprisingly, we hear quite often how afraid investors are of their brokers. This fear seems to stem from a feeling investors have if they ask questions or have problems they will look or sound stupid.

This attitude is not necessarily bad for the broker. If you are afraid to call then they aren’t paying their support reps which is good for them and bad for you. We suggest that individuals put their prospective broker’s service to a two-step test detailed below before committing to moving or opening an account.

Call during peak and off hours. The response you receive will tell you a lot about how a broker staffs during busy market times. When you have an issue, long hold times can be extremely frustrating.

Ask detailed trading and investing questions. For example, ask your potential broker to explain how a bond’s yield works or whether selling a put is riskier than buying a stock. You may be surprised to find out how little the broker on the phone actually knows.


Most of the brokers we surveyed when writing this series has a similar product line. They all offered brokerage for stocks, options, bonds and mutual funds and a few even offered access to futures and forex. This sounds good but it does not mean they are equivalent. Stocks and options may be fairly straightforward and equally convenient but that is where the similarities end and the differences begin.

If you trade something other than long stocks and options, ask for a demonstration. Make sure the broker can show you how to buy a bond, mutual fund or option spread before you check those requirements off your list. Chances are very good you will see significant differences in the ease and availability of order entry for non-stock and option trades.

Interest Rates

Brokers charge interest on margin and will usually pay interest on unused capital balances. The rates vary considerably from stratospheric charges to near zero payments. This is another area of differentiation and for most traders, that will hold a cash balance, it can turn into a material opportunity cost.


We saved tools for last because that is where they belong. Tools can only be an advantage if you actually need them or can’t get them for free somewhere else. Before you include a broker’s stock or spread screener into your consideration double check with free finance portals like Yahoo! finance or to make sure the same thing isn’t available for free.

This is true for any of the tools marketed as an advantage. We feel that most investing tools fall within a category we call “financial porn.” They may look attractive but they have almost no ability to translate functionality into profitability.

Keep in mind that brokers work for you. They may attempt to shift that balance of power to themselves by requiring “applications” and withholding or charging for quality service but the bottom line is that you are paying them not the other way around.

Don’t get married to a specific broker; keep them on their toes by holding accounts with more than one at a time. Most importantly make sure you are doing rigorous due diligence before finalizing your account. You will learn a lot about them in that process that can save you time, money and heartache in the future.

The Truth Behind Broker Commissions

When you trade a stock, fund or option, you pay a broker a commission to place the trade for you in the open market. Brokers compete fiercely for online commission business and they will try to differentiate themselves within the industry by offering the lowest commission rates.

[VIDEO] The Truth Behind Broker Commissions

It would seem that a straightforward comparison of broker commissions would easily show what brokers are truly leading the lowest-commission war. However, that is not the case. This article will discuss the reasons why comparison is difficult and what commission rates you should be paying the most attention to.commissions

Most online broker websites have a commission comparison table somewhere within their marketing information. Invariably, the major brokers will show themselves as the low cost leader compared to their competitors.

Disclosing commissions accurately is a regulatory requirement so how can all brokers show themselves as the cost leader and still be telling the truth?

Most brokers charge different commission rates for each kind of trade. Buying 100 shares of stock costs a different amount than buying 1,000 shares or a mutual fund or a bond or an option… you get the idea.

There is an extremely large number of possible trade combinations that will all cost a different amount. Most brokers can find some combination of trades, in which, they are the low cost leader. These costs may look good but probably does not reflect the way you trade.

For example, the lowest cost for trading 100 shares of stock we found in a survey of the major online brokers was $7 per trade and the highest commission for the same trade was $15. However, if you needed to talk to a broker to execute your trade the low cost leader would charge you $27 while the higher commission broker would talk to you for free.

The commissions for mutual funds and options were also more expensive with the “low cost” leader. This additional information could easily shift the balance depending on what kind of investor you are.

The bottom line for these “comparison” tables is that they are highly footnoted, biased and don’t reflect your needs as an individual. The best course of action is to completely ignore them the same way you would toss a piece of junk-mail.

On the bright side we feel that there is a logical way to evaluate a broker’s commission schedule in a meaningful way but it requires a little effort on your part:

  1. Evaluate and record your typical trading needs and size

    Create a list of the types of trades you execute (or would like to execute), the typical size of those trades, and your trading frequency. Call the brokers you are evaluating and ask each of them to quote to you how much commissions they will charge based on your list of typical trades. They want your business so make them work for it. Evaluate broker commissions based on your own behavior rather than a piece of advertising.

  2. Ask for lower rates or other concessions

    Keep in mind that most brokers are showing you their advertised or “rack rates.” They may be willing to discount their rates for you and will frequently match the rates you want from another broker to get your business. The point is that you won’t get what you don’t ask for and this may allow you to match the commissions you want with the broker that has the tools, products and service you prefer.

  3. What are the other fees?

    Brokers publish commissions and fees in long disclosures. These are boring and are once again too general to be very useful. Now that you have a quote for the commissions that relate to you specifically you are more prepared to find out what other fees will be charged against your account.

Some of the fees you should look out for include inactivity fees, monthly or quarterly minimums, transfer fees, margin costs and the fees associated with calling a broker on the phone.

As an individual investor you can’t control the market or your returns. This makes it absolutely critical to maximize your control where you can. Trading costs are a key area to evaluate when choosing a broker and once you know what to look for it really isn’t all that difficult. A little effort on the phone can save you a lot of money.


Image courtesy Ben Fredericson.