Online Stock Brokers (How to Trade Stocks Online)

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One of the most iconic and coveted investment careers is that of the stock broker. The job has come to symbolize Wall Street itself and even those with little or no investing experience know what a stock broker does for a living.

Stock brokers are basically Wall Street middleman: buying and selling stocks on behalf of investors, collecting a commission for each transaction.

But stock brokers are slowly becoming a dying breed. Thanks to the Internet, passive investing and automation, investors are now capable of doing themselves what brokers have traditionally charged them to do.

Today, those looking to grow their wealth or diversify their portfolio can take advantage of online stock brokers. Whether you’re new to investing or a seasoned investor, you can use this guide to learn or brush up your skills on how to trade stocks online. For a fuller understanding of online stock trading, read end to end. Or, navigate to a section of your choice using the list below.

What Are Online Stock Brokers?

An online stock broker is a platform run by a brokerage firm that allows investors to buy, sell, and trade assets like stocks, bonds, and mutual funds. Previously, stock brokers were real people working as trading representatives, buying and selling shares on behalf of their clients. However, technology reinvented the investing world, allowing anyone with a computer and funds to trade stocks right from the comfort of their home.

If you’re new to investing, you may be wondering, “what’s a stock?” Simply put, a stock is a type of security that gives investors partial ownership in a company. Stocks are bought on an exchange, such as the New York Stock Exchange, and give stockholders a direct stake in a company. Investing in stocks can be a great way for investors to build and diversify their portfolio and buy shares of companies they think will perform well.

By using a stock brokerage online, investors can now invest in stocks on their own without having to pay the typical brokerage fee and commission that in-person stock brokers charge, which leads to our next question—how do online stock brokers make money? 

How Do Online Stock Brokers Make Money?

On October 1, 2019, brokerage firm Charles Schwab announced it would charge $0 commission-free online trading for U.S. stocks, options, and exchange-traded funds (ETFs). This announcement started a price war with its competitors, resulting in other large brokerage firms, such as T.D. Ameritrade and E-Trade, to slash their online trading to $0 as well. Investors then became panicked, resulting in shares in these companies to fall drastically.

So, why did online brokerage firms decide to eliminate a source of revenue? Because they found offering free commissions on trades can draw in more customers to their platforms. Charles Schwab, for example, also offers banking services. With more customers coming to use their free online trading platform, they may be enticed to use Charles Schwab as their bank. In fact, 61 percent of Charles Schwab’s revenue (as of 2019) comes from their banking services.

How Do Online Brokerage Accounts Work?

In order to buy stocks, bonds, or mutual funds, you need to need to work with a stockbroker and open up a brokerage account. Through an online stock broker, you will open an investment account to store your cash that will be used to buy and sell stocks and other securities. Whether you’re investing in penny stocks or looking for AI investments, there are numerous securities you can invest in with an online brokerage account.

In order to gain access to an online brokerage account, you will need to create an account with an online broker of your choice. There are plenty of online brokerages to choose from, so make sure to do your research to ensure you choose the right online broker for you, which we’ll discuss later on in this post.

Once you open an account with an online broker, you will be able to access any of the financial exchanges your online broker is a member of, such as the New York Stock Exchange or NASDAQ. Your online stock broker will then be able to act as the intermediary to make trades on your behalf.

What Type of Trading Tools Do Online Brokers Offer?

One of the reasons online brokers are so affordable compared to in-house stock brokers is that they often have fewer tools, requiring online investors to research stocks on their own and decide what stocks are worth buying and selling. However, depending on the online stock broker you choose, you may have access to certain tools. Some trading tools online brokers might offer include:

  • Automated investing technology
  • Access to financial planners for long-term investment planning or account management
  • Portfolio management software
  • Tax optimization
  • Automatic rebalancing

For investors looking for a more hands-off approach, online stock brokers might be your best bet. Their high-tech services and software can do a lot of the work for you with little to no human interaction. However, if you’re looking for a more personal investing experience, working with an in-house stock broker will allow you to establish a more direct relationship with a financial advisor that can be beneficial for more complex financial situations.

Are Online Stock Brokers Safe?

Generally speaking, online stock brokers are safe. Most online stock brokers add heightened security measures, such as encryption, cookies, and other safety protocols, to keep the funds in your account safe and secured. These measures make it difficult for cybercriminals to hack into their system and steal any funds. Always make sure you review your online stock broker’s protection measures and how they use encryption and cookies to protect your account.

One thing to keep in mind is that online stock brokers won’t protect you if you make a bad investment. For example, if you invest in a stock that loses value over time, online brokers aren’t responsible for money lost from a bad decision. However, the Securities Investor Protection Corporation (SIPC) does protect you in the event your brokerage firm fails. If your online brokerage firm is a member of the SIPC, they will protect up to $500,000 per account, with a $250,000 cash limit.

What Should I Consider When Choosing an Online Stock Broker?

As with any financial decision, it’s important to do your research to know what you’re getting into. Not every online stock broker is the same, which is why you should take note of key factors when choosing an online stock broker. Some factors to look for include:

  • Customer service: When you’re using an online trading platform, you might run into issues or have questions. With that said, you’re going to want to choose an online stock broker known for high-quality customer service. This way, you can get any issues fixed, whether it’s something concerning a trade or your brokerage account when you need it. To determine whether an online stock broker is customer-friendly, look at online reviews from current or previous members, and look for customer-friendly features on their trading app and website.
  • Price: If you’re like most investors, you don’t want a large chunk of your money going toward expensive fees and commissions. Fortunately, most online stock brokers are extremely affordable, with most offering $0 commissions. Before you sign with an online stock broker, compare their fees and trading costs with other online stock brokers.
  • Resources: Compared to in-house stock brokers, online stock brokers often offer fewer broker resources. However, this doesn’t mean you’re left high and dry. When choosing an online stock broker, make a list of all the resources they offer, such as research tools, the digital trading app’s functionality, and how easy it is to place trades.
  • Support: Depending on your investing experience, you may need to consider the amount of support an online stock broker provides. Because online brokers offer no assistance when it comes to buying and selling stocks, you’ll need to consider online stock brokers that offer robust research and trading tools, along with premier customer services, so you can make informed investing decisions.

What Are the Best Online Brokers?

Now that you know about online stock trading, you may be wondering what online stock brokers are the best. According to blackwallet, a financial literacy site, these are some of the best stock brokers online:

  • E*Trade: This is an online platform that allows you to trade a wide range of securities, including common stocks, preferred stocks, ETFs, options, mutual funds, fixed-income investments, and futures contracts. This platform is great for beginner and experienced investors alike, and offers data and research, retirement planning, and commission-free ETFs.
  • Robinhood: This is a free trading app you can download on your smartphone to trade stocks, cryptocurrency, ETFs, and options without paying commissions for fees. The mobile and web app both offer basic trading functionality, which is great for beginner investors.
  • Stash: This is another investment app that works well for those just starting to invest. Through this app, users can choose investments like stocks and ETFs and receive guidance when selecting their investments.
  • Charles Schwab: For new and experienced investors, Charles Schwab can be a great online trading platform. Charles Schwab caters to a wide range of investors and offers a great selection of tools for users to take advantage of.

Before choosing an online trading platform, make sure to do your research and consider the services, tools, and research options each platform offers.

The Bottom Line

Online stock brokers provide an easy and accessible way to invest in stocks, bonds, ETFs, and other securities. Compared to in-house stock brokers and financial advisors, online stock brokers are much more affordable, giving more people access to the investing world. The trade-off, however, is that investors need to conduct their own research when it comes time to buy, sell, and trade securities. With the right online stock broker, you can gain access to research tools and other services to help you make better-informed decisions. At Mint, you can take advantage of our free investment calculator, which can help you create investment goals and determine ways you can diversify your portfolio.