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How to Compare and Choose Online Stock Brokers

No fee stock trades and zero commission trades are purported features of online stock brokers. It sounds too good to be true, doesn’t it? After all, comparing online stock brokers always seems to produce more questions than answers.

If you’re waiting for the catch for zero commission online brokers, there’s good news: There isn’t one — as long as you know what you’re getting into when you choose an online stockbroker.

The fact is commissions on equity trades are just one way stockbrokers make money.

Online stockbrokers can also make money by charging extra for limit orders, options orders, mutual fund trades and bond trades.

What’s more, stockbrokers make money every time you borrow money on margin and, of course, on fees.

What kind of fees?

Like full-service brokers, discount brokers can charge fees for just about anything under the sun.

From the more typical annual IRA account maintenance fees to inactivity fees, paper statement fees, fees for accounts that fall below a certain balance, fees for transferring part or all of your account to another firm and more.

Finally, many online brokers have different commission schedules based on the price of the stock, the balance in your brokerage account, the frequency with which you trade and the number of shares you’re buying or selling.

How to Decide if a Zero Commission Online Stock Broker Fits

So how do you determine if that zero-commission online broker is right for you?

Choosing an online stock broker comes down to four things…1. What you plan to trade.

Most of the zero-commission offers are for equity trades only. (Wells Fargo is an exception. You can trade exchange-traded funds (ETFs) and mutual funds in its zero-commission package.)

Plan to trade options? You’ll pay $4.50 + $0.50 per contract at Zecco, $9.95 + $1 per contract at Wells Fargo (WFC), and $19.95 + $1.50 per contract at Bank of America (BAC).

That still makes Zecco still a low-price leader in the industry, but low-cost isn’t free. And Zecco is counting on attracting option traders who trade actively. “Option traders are profitable customers,” says Michael Feser, president of Zecco.

2. How frequently you plan to trade.

All of the major brokers that currently offer zero-commission trades have limits on the number of trades you can make per month.

Granted, the limits are fairly high: 10 trades per month for Zecco, 30 for Bank of America and 100 free trades per year for Wells Fargo.

But before you sign up for one of these accounts, figure out how many trades you typically make in a month or year to see if you’ll end up going over the limit.

3. What the hidden costs are that you’ll have to pay to get those free commissions.

On the flip side, if you’re a buy-and-hold investor who makes very few trades, a zero-commission discount broker can be a good deal. But you have to ask yourself if the cost of getting that zero commission is worth it.

Do you already have $25,000 in deposits at Bank of America or Wells Fargo?

If not, is it worth it to transfer that much money into a low-paying checking, CD or money market account at one of these banks just to save a few bucks on fees? Could you be investing that money at a higher rate elsewhere?

Zecco requires just $2,500 to open an account. But you’d better be sure you’re happy with Zecco’s web site, research tools and customer service.

The firm charges a $50 fee to transfer your account out to another broker. So does Wells Fargo, and Bank of America charges $75 for a full account transfer.

Other fees these firms charge include IRA custodial fees, account maintenance fees, IRA termination fees and short-term trading fees for mutual funds. Some of these fees are waived if your account is large enough or you have enough trading activity. Just be sure to ask before you sign on.

4. How you plan to execute your trades.

Nearly all of the zero-commission deals are for online trading only.

Want a broker’s help? You’ll pay $19.99 for broker-assisted trades at Zecco, and Zecco doesn’t offer touch-tone telephone trading at all.

At Wells Fargo, touch-tone telephone trades are free (as long as you qualify for their zero-commission trades in the first place), and broker-assisted trades cost $25.

And Bank of America charges a whopping $32.50 for phone orders and $44.50 for broker-assisted trades—hardly in the deep discount range.

Zero Broker Commissions Aren’t Necessarily Too Good to Be True

These zero-commission deals aren’t come-ons. They can work for you. You just have to know what your trading style is and what the total costs are up front.

Finally, make sure you’re comfortable with the broker’s web site interface, research tools and customer service. If you have trouble getting someone to answer the phone or your emails, it doesn’t matter how low the commissions are. You’ll want to go elsewhere.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/07/compare-brokers-choose-online-stock-broker/.

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