In the era of digital advancements, the trading landscape has undergone a remarkable transformation. Back in the day, trading operations primarily relied on paper-based systems, which were prone to various challenges due to the absence of digital resources. Fast forward to the present day, most trading activities occur online, with paper-based ledgers serving merely as backups for digital records. The advent of online brokerage firms marked a significant turning point and has since gained immense popularity.
Online trading has been hailed as an “internet revolution” by the Massachusetts Institute of Technology. Despite the widespread adoption of online trading, selecting the right online broker remains a complex task that demands thorough research. However, the rewards obtained through this process are well worth the effort.
While it is true that there are unscrupulous individuals seeking to exploit unsuspecting traders, it is important to note that there is also a multitude of reputable online brokers committed to assisting traders in their journey towards growth and success. Moreover, online brokers increasingly cater to novice investors, making it possible for individuals without prior experience to venture into online trading without barriers.
Why Should I Use an Online Broker?
Thinking in terms of disadvantages and advantages, you’ll find that online brokers have their pros and cons, just like any other service.
Advantages of Online Brokers
Convenience and cost reduction are two of the biggest advantages to online brokers. These are often quite persuasive, too. Online brokers are faster, allowing you to conduct trades with the click of a button, as opposed to a phone call to a personal broker. Online brokers are also cheaper. Bloomberg found that investors pay an average of just $5-$10 in trade fees with online brokers. These fees are cheaper than what you’ll find with a personal broker, who usually has an average fee of $150.
Additionally, online brokers often have an entire research database, which you can use when trading. Again, this vast database of market research and commentary is available at the click of a button. Lastly, most online brokers offer mobile apps, in addition to websites and downloadable clients. You can complete trades via smartphone, which is great for traders who are on-the-go.
Disadvantages of Online Brokers
As with any service, online brokers have their disadvantages. Namely, they require you to get familiar with technology that can be confusing. Not all software for trading is intuitive. If you’re not technologically proficient, getting started might be a hassle. Additionally, there are online brokers that scam people, especially victims who are not internet savvy.
Is It Safe To Use An Online Broker?
That leads us into our next topic, which is whether online brokers are safe to use. Luckily, the answer is yes, if the broker itself is legitimate and regulated. Online brokers are regulated by governing bodies like the SEC, CFTC, NFA, and FINRA. Most of the industry is heavily regulated, especially since the 2008 financial crisis, which spurred Congress to take a hard look at Wall Street.
Legitimate and reputable online brokers are established firms. They have customer reviews, regulation, and a paper trail (digital or otherwise) to their name. Again, finding a reputable broker comes down to conducting research and seeing for yourself that the broker is regulated and abides by the law.
How Can I Tell If An Online Broker Is Regulated?
Generally, you’ll be able to tell if an online broker is regulated on the broker’s website. The broker will usually list its regulation at the bottom of its website. Disclosure laws mandate that the broker include the regulation in its company information.
If not at the bottom of the website, the regulation will likely be in one of the company hyperlinks. Additionally, the major regulatory bodies in the US have their own lists of the companies they oversee. Note: if a broker is not transparent or upfront about its regulation, that is a major red flag.
What Should I Look For In An Online Broker?
In addition to making sure that an online broker is regulated, you should also look for an online broker who is high-tech, has good customer service, offers research and data tools, has fast withdrawal and deposit times, and charges fair fees and commissions. Whether you are looking for a non-specialized stock broker or a more specialized broker such as a forex broker or CFD broker, you should consider these core factors before making your decision. There are many more qualities of a good online broker, but these five are some of the biggest ones.
You don’t want to be constantly frustrated, spending your days trying to fix the broker’s software. That takes away from valuable trading time. Make sure a broker has a glitch-free system. Customer reviews are almost always likely to mention if a brokerage firm has technology issues, as that is universally frustrating.
Good Customer Service
Customer service should be responsive, friendly, and knowledgeable. It shouldn’t take a company more than forty-eight hours to respond to an email, and even that’s pushing it. High-quality customer support is a key indicator of a good firm.
Research and Data
A good online broker will offer you research and data tools, which can help you make decisions before you execute trades. Whether this data and commentary is self-generated or outsourced, it is an important database to have at your fingertips when trading.
Fast Withdrawals and Deposits
You don’t want to be waiting weeks for a check to appear in your account. Check to see how long withdrawal and deposit times are. Depending on the method that you use, the time for checks to clear shouldn’t exceed three days. Also, see what methods of deposit the broker accepts to gauge if they are compatible with your financial situation and preferences.
Fair Fees and Commissions
Finally, fees and commissions should affect your decision of which online broker is best for you. Fees and commissions shouldn’t be excessive, and you shouldn’t feel like you’re losing an exorbitant amount of money. Online brokers have been slashing fees and commissions lately, a trend investors hope continues. For the moment, due to the recentness of Cryptocurrency trading, you may find that Cryptocurrency broker fees are higher when compared against other non-specialized stock broker platforms.
Again, there are many more qualities that are important, but these five are the ones most likely to stand out on the day-to-day. Read reviews that include these topics, and always conduct thorough research before settling on an online broker.