Choosing a Broker
When choosing a broker you basically have two options: full service or online. With full service brokerage firm, like Goldman Sachs, you will have contact with an actual stock broker. In theory, these stock brokers give you advice and investment ideas. Although, there are many great stock brokers out there who have achieved fabulous returns for their investors, most stock brokers are sub par. In exchange for high commissions, these brokers give you generic stock ideas researched for the masses that usually do not beat the market. Needless to say, unless you can link up with one of the brokers with at least five years of proven investment results we do not recommend full service brokerage firms.
If you are not going to put your trust in a full service brokerage firm, then your only other option is an online discount brokerage. We recommend this choice for most people. With an online firm you are going in alone and there is no stock broker posse to back you up. However, with the performance of most full service brokers this isn’t necessarily a bad thing. With an online brokerage firm, there is no one pushing you to make bad investments which can often happen with a full service broker.
There are tons of options for out there for online brokerage firms. We recommend most people go with a brokerage firm that has no start up or maintenance fees (fees that the firm charges you just to have your account open) and a flat fee for making trades. Many brokerage firms charge different rates to make trades based on how often you buy and sell stocks. We don’t recommend these types of brokerage houses because they encourage investors to trade more often which will hurt your returns in the short and long run.
Two online brokerage firms that meet this criteria (at the time this article was published; double check to make sure there policies have not changed) are Scottrade and Ameritrade. Scottrade charges seven dollars per trade and Ameritrade charges ten dollars per trade. Even though Scottrade is cheaper, we recommend Ameritrade. Ameritrade was named the number one online broker by Barron’s during 2007. Also, Ameritrade offers free dividend reinvestments. This means that whenever a company pays a dividend Ameritrade gives the investor the option for reinvesting dividends for free; a feature that Scottrade doesn’t offer. For more on the importance of reinvesting dividends click here.