Investing 101 Part 3: How to Choose the Best Online Broker for Beginners June 22, 2021

Investing 101 Part 3: How to Choose the Best Online Broker for Beginners

At a glance:

  • Not all online brokers are the same. Different brokers charge different fees, depending on a host of factors, such as trade frequency, account type etc.
  • When choosing one, you should consider at least 8 criteria

Before investing, you first need to set up a brokerage account. Since there are only a few top online brokers, that sounds easy, no?

That is, until you come face to face with intimidating financial jargon that could make beginners run for the hills!

So, what should you do? Where do you start?

As first-time investors, how do you nail down an online broker that can best serve your interests?

In today’s Investing 101, we offer eight basic guidelines to help new investors choose the best online broker. Let’s begin!

What’s an online broker?

Some of you may be wondering what an online broker is. How different are they from TRADITIONAL brokers?

Online brokers are intermediaries or middlemen who facilitate transactions of financial instruments such as stocks, ETFs and CFDs. As an investor or trader, you place orders to buy or sell assets with your broker. Based on your orders, the broker executes the trade on your behalf for a fee.

With a traditional broker, investors call their dealers before making any trades.

An online broker uses a computer system to fulfil the role of a dealer. You probably can guess that an online broker reduces the time and cost of each transaction.

How to choose the best online broker: 8 things to consider

Now that you understand what an online broker does, we will turn to nine key considerations you should take into account of when choosing the best online broker.

1. Brokerage fees

New traders may be under the impression that there is only one transaction fee.

Things are more complicated than that!

Brokers charge different types of fees, depending on how often you trade, the type of asset being traded and the type of account you open.

To help you understand the fee structure of online brokers, look out for the following when choosing one:

  • Account opening fee: To open an account, some online brokers may charge new investors a fee.
  • Minimum deposit: The minimum deposit could include both cash holdings and asset value. Take note of how much you have to deposit and maintain in your online account. Fees may be levied if you fall below this limit!
  • Account maintenance fees: Online brokers may charge customers a flat fee at regular intervals to maintain their accounts.
  • Inactivity fee: Inactivity fees are imposed when account holders fail to meet certain criteria, such as completion of a minimum number of trades within a specific time.
  • Corporate action charges: Corporate actions may alter the prices of stocks and other financial products. These include dividend distributions, stock splits and rights issues. Brokers may charge clients for servicing these corporate actions.
  • Trading fees or commission rates: You are charged a fee whenever you execute a trade. For most brokers, different rates apply to each market, asset or whether you use the services of a dealer for your transaction. There may even be a minimum fee!
  • Account closures: If you decide to close your account, some brokers may charge an account closure fee.

There are more fees involved in a brokerage account but for a start, these are probably what you need to know. Take note of the above because fees can add up quickly!

Related: Check out POEMS’ brokerage fees here!

2. Ease of setting up an account

As a new investor, there are forms to fill and accounts to register. There are multiple hoops to jump through before you can purchase your first stock, ETF or other financial instrument. Some brokers will require you to print, fill and mail out a form while others may need you to book an appointment. If you prioritise speed and convenience, research all the account opening procedures before you proceed!

Related: You can start trading with a POEMS account online from the comfort of your home in just two simple steps. Here’s how!

3. How beginner-friendly the trading platform is

If you have been reading up on the 20 best resources for investors after our previous article, you may have come across some foreign terms such as limit, shorting and margin. The last thing you want now is a complicated trading platform to navigate!

How do you assess whether there is adequate support and guidance given to new platform users? To help you determine what you want and find out what you can get out of a trading platform, check out the following:

  • Are there tutorial videos and FAQs?
  • Is there is a demo trading platform for you to experiment with dummy stocks and other assets? If so, test it out and see if you are comfortable with the interface.
  • How responsive is the platform’s customer service? Are there multiple channels for you to seek help when you need it?

Related:20 Best Resources for Beginner Investors

4. What are the types of assets or trading products available?

Most people will register with an online broker to trade stocks. However, you may be interested in other asset classes some time down the road. Besides stocks, other tradable assets include CFDs, ETFs and options. Once you understand these financial instruments, you may want to explore them for your portfolio based on your risk appetite and trading objectives.

5. Range of markets available

If you already know what assets you wish to hold, ensure that they can be purchased through your selected online broker. For instance, Lloyds Banking Group is listed on the London Stock Exchange (LSE), Softbank on the Tokyo Stock Exchange (TSE) and Manulife is on the Toronto Stock Exchange (TSX). Each online broker offers access to SOME but not all exchanges!

Related: Trade over 26 global exchanges with POEMS!

6. How hands-on do you want to be with your investments?

In our Investing 101: Part 1, we asked you to consider how much time you are willing to commit to investing. Your answer to this question will determine the online broker you eventually go with.

Now, ponder over these follow-up questions:

  • Do you require access to a dealer?
  • Do you see yourself as a frequent trader, OR
  • Would you prefer if your online broker carries financial instruments that allow you to take a more hands-off approach to your investments?

By asking these questions when choosing an online brokerage, you can better compare how each broker corresponds to your investment needs.

Related: How to Cultivate an Investor Mindset

7. Payment methods

When you purchase anything online, do you have a preferred payment method? Think about it.

This could be Visa, MasterCard, PayPal, bank transfers or e-wallets such as PayNow, GrabPay and Apple Pay. Likewise, online brokers accept different payment modes. You should consider which ones are convenient for you.

Related: Check out POEMS’ wide range of payment modes

8. Terms and conditions

Most online brokers run attractive promotions to entice new investors. If these promotions sound too good to be true, ALWAYS check their terms and conditions. The catch is all in the fine print! When substantial sums of money are involved, you can never be too careful.

Pay attention to the following when you scrutinise terms and conditions:

  • Is there a minimum deposit, number of transactions or trade volume to qualify for the promotion?
  • Does every new account receive the benefits or are they awarded randomly, like in a lucky draw?
  • When do the benefits such as lower commission rates, access to data, etc. expire for new account holders?

Bonus: Customer reviews

Finally, once you have researched the various online brokers, read reviews to get a general sense of the broker.

For Singapore, websites such as Seedly and MoneySmart both publish and solicit reviews of brokers from investors. We urge you to look up the reviews AFTER you have done your homework on the above. A word of caution, reviews could be biased and you should still form your own opinion on what can serve you best!

To recap, the following are our 8 criteria for choosing the best online broker for beginner investors:

1. Brokerage fees

2. Ease of setting up an account

3. How beginner-friendly the trading platform is

4. Types of assets or trading products available

5. Markets you can access

6. How hands-on do you want to be with your investments?

7. Payment methods

8. Terms and conditions

9. Customer reviews (Bonus!)

Yes, there are many factors involved in deciding where to open your account. Brokerage fees may not even be your top-most priority.

Our advice is to do your research, do not be distracted by new account promotions and ALWAYS read the fine print.

If you have more questions after reading this article, we welcome you to join our Global Markets Investing Community on Telegram. Eager to start investing? You may want to begin by opening a POEMS account or speak to one of our licensed representatives.



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About the author

Ng Ming Qian (Intern) & Joel Lim (ETF Specialist)

Ming Qian is an intern from the Global Markets Desk at Phillip Securities and an Economics Undergraduate at the National University of Singapore. Outside of school, Ming Qian hustles as a freelance writer and blogger who simplifies complex topics for readers. When he is not writing or buried in his books, you can probably find him tending to his aroid plants or bingeing on Grey’s Anatomy.

Joel is the ETF Specialist from the ETF desk in Phillip Securities. He helps to provide sales support and trading ideas to retail investors, remisiers, in-house dealers, and fund managers. Joel also works closely with ETF issuers on new product and business development projects.

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