Choosing a broker is a very important decision because their fees, services offered, and products available will affect the performance of your portfolio.
In Comparing Brokers: Different Types of Investment Advisors we outline the major differences between full service brokers and discount brokers, and I gave a partial list of full service brokers.
In this column we will focus on the major discount brokers.
Lower fees is the major difference between a discount brokers and their full service counterparts. Though all of the discount brokers listed below offer lower transaction costs than a full service broker, they generally offer their lowest prices to those making larger trades. A broker may advertise, for example $5 trades, but in fact that fee only applies to orders of $5,000 or greater; for trades lower than $5,000 they may charge as much as $20 or $25.
So, if you have a small amount to invest, take heed of investment minimums for each trade, because the house may only accept trades above a certain number of shares. Also note whether the brokerage has a minimum account balance. If your investment loses value you may have to deposit more funds to keep the account active.
Look out for inactivity fees. These are fees a broker can charge if no transactions are made over a specified period of time (typically one month or longer).
Discount brokers typically offer fewer investments than a full service brokerage. Some may not offer commodities contracts; others may not offer stock options trading. The mutual funds offered by discount brokers, though typically very diverse, will vary from broker to broker. If you have your heart set on a particular mutual fund, you will want to inquire if the broker offers it.
Most of these brokers will offer traditional IRAs and Roth IRAs as well as standard taxable accounts. Make sure you know what type of account you want before you apply.
NEXT: Broker Comparison Table