The Best Online Brokers: Revealed!
A Daily Reckoning Special Report
By Greg Guenthner
Dear Daily Reckoning Reader,
Six months ago, Susan and John (neighbors who invest together) bought a $1 penny stock. They each spent $500. And their orders were filled at the exact same price.
After trading even for months, the company came out with a strong quarterly earnings announcement a few days ago. Afterward, the penny stock rose to $2 in a hurry – doubling John and Susan’s money. As you might expect, the two decided to sell their penny shares. They immediately called their brokers and exited the trade – at the exact same price.
At the end of the day, John and Susan met at Starbucks to revel in their success. They pulled up their account summaries as they sipped on a skim latte. And to John’s surprise, Susan had more money in her account!
How could that be? They each invested in the same company. They each bought the hot penny stock at the same price. They each spent $500. And their brokers each got them at out the exact same price. Yet Susan’s account showed a balance of $986. And John’s account was worth $950.
John almost choked on his girly coffee. “What gives?” he said out loud.
Well, it turns out, Susan and John used different online brokers for their penny stock investment.
The Best Online Brokers: The Difference Between Red & Black
John used Fidelity’s online services to buy and sell his penny stock shares. He paid $25 per buy and sell transaction. (So his total commissions were $50 for this trade). And Susan used Scottrade – a deep discount online broker with virtually no bells and whistles. She paid $7 per buy and sell transaction. (So her total commissions were $14 for this trade).
When it was all said and done, Susan walked away with a total net profit of 97.2% and John made 90%. And the only thing that was different was their broker!
This minor detail is a big deal – especially for small-cap and penny stock investors and traders like you. Using the right broker can save you thousand of dollars a year in profits. Choosing wisely can be the difference between making 30% a year and barely breaking even. In fact, having the right broker is the most important choice you can make – except for choosing what stock to invest in.
The Best Online Brokers: The Official Broker Review
Having said all that, my colleagues and I spent the last six hours researching online brokers for you – comparing commissions, fee structures and balance requirements. I’ve also included phone numbers, Web addresses and a few notes on what kind of services they offer.
Check it out. Here’s my official Online Broker Review (in no particular order)…
1) E*TRADE: E*TRADE charges $12.99 for both market and limit orders – including penny stock trading for $1 or less and all OTCBB stocks. You need at least $1,000 to open an account with E*TRADE. And there is a $40 quarterly fee for using their services. E*TRADE is a cheap online broker mainly for active traders who don’t need a lot of handholding.
E*TRADE’s contact inf phone: 1-800-387-2331, Web address: www.etrade.com
2) Fidelity: Fidelity charges $19.95 for both market and limit orders – including all penny stocks. You need an opening balance of $2,500 to open an online account. But once you do, there is no quarterly or annual fee.
Fidelity offers a lot more research capabilities – and is marketed for the more serious investor (with a higher net worth) who likes the bells-and-whistles of a full-service broker.
Fidelity’s contact inf phone: 1-800-544-6666, Web address: www.fidelity.com
3) Scottrade: Scottrade is one of the cheapest online brokers you will find. It charges $7 for both market and limit orders. There are no quarterly or annual fees. So even if you are an inactive investor, you won’t be penalized for “not trading.” The only drawback for penny stock investors is this…
In addition to the $7 flat commission, they charge an additional fee of 0.5% of the total principal. So if you spend $500, you owe Scottrade an addition $2.50 added onto that $7 commission – making your total commission come to $9.50.
Like E*TRADE, Scottrade is a very bare-bones broker. If offers no handholding whatsoever. But it is cheap!
Scottrade’s contact inf phone: 1-800-619-7283, Web address: www.scottrade.com
4) Charles Schwab: Charles Schwab may be the pioneer in the discount broker world, but it isn’t the cheapest. It charges $19.95 for market and limit orders – and an additional $0.015 for all shares over 1,000. In addition, Schwab charges you a service fee of $45 a quarter.
To open an account with Schwab, you need a minimum of $2,500. And for small-cap investors, you need to be aware of one thing…
It only costs $19.95 to buy or sell any small-cap or penny stock. However, if you buy more than 5,000 shares, you have to pay $0.003 for every additional share.
Charles Schwab’s contact inf phone: 1-866-855-6770, Web address: www.schwab.com
5) TD Waterhouse: TD Waterhouse charges $17.95 for market orders and $20.95 for limit orders. You need a $1,000 starting balance to open an account with TDW. And you are charged a $25 quarterly fee – which is waived if you make three or more trades in a 6-month period.
For you small-cap (or penny stock) investors, there is no additional fee to trade or invest in OTCBB stocks.
One note to keep in mind about TDW: It is in the process of being acquired by Ameritrade. So my guess is it will soon adopt Ameritrade’s commission and fee structure. Of course, we’ll have to wait and see. The “helpful representative” I spoke to couldn’t tell me a thing. Shocker!
TW Waterhouse’s contact inf phone: 1-800-934-4448, Web address: www.tdwaterhouse.com
6) Ameritrade: Ameritrade is one of the better-known deep discount online brokers. It charges a flat $10.99 for all market and limit orders – and that includes your OTCBB and penny stocks. You need $2,000 to open an account withAmeritrade. And you are charged a $15 quarterly fee if your account balance falls below $2,000 OR you don’t make four trades every six months. (In other words, if you make four trades, you are exempt from the $15 fee).
Ameritrade’s contact inf phone: 1-800-454-9272, Web address: www.ameritrade.com
7) Firstrade: Firstrade is one of the online brokers I never heard of before today. But it caught my attention with its $6.95 commissions, no annual or quarterly fees and no minimum opening balance required. It is truly a deep discount brokerage service that should only be used if you don’t need any help whatsoever.
As far as buying and selling penny stocks, Firstrade does mark up their commissions a bit. If you trade stocks that sell for $2 or less, you must tack on an addition fee of ½ a cent per share. So if you buy 1,000 shares of a $1 stock, it will cost you $6.95 plus $5. So your total commission would equal $11.95.
Firstrade’s contact inf phone: 1-800-869-8800, Web address: www.firstrade.com
8) Vanguard: Vanguard is a more full service online broker – similar to Fidelity and Schwab. So it should come as no surprise that you must pay more that you would with E*TRADE or some other deep discount broker.
Vanguard charges $25 to execute any market or limit order. It assesses a $30 annual service fee for every client. You need a minimum opening balance of $3,000. And if you are interested in buying penny stocks, it gets a little hairy. You pay a flat $20 commission per play plus 2% of the total principal.
Vanguard’s contact inf phone: 1-800-992-8327, Web address: www.vanguard.com
9) Wang Investment: This is another broker I knew nothing about before today. But it too is competing with the likes of E*TRADE, Firstrade and Scottrade. Wang Investment charges $8 for most market and limit orders. I say “most” market and limit orders because it costs $25 to buy or sell stocks that trade for $1 or less.
They charge a $30 service fee every six months. And there is no minimum opening balance required to open an account with Wang.
Wang Investment’s contact inf phone: 1-800-353-9264, Web address: www.wangvest.com
10) Trading Direct: Trading Direct charges $9.95 for all market and limit orders – including OTCBB and Pink Sheets stocks. There is no minimum opening balance required to start an account up. But they do charge a $60 annual fee — unless you make at least one transaction per year.
Trading Direct’s contact inf phone: 1-800-925-8566, Web address: www.tradingdirect.com
I hope this helps you in your penny stock trading. Remember, money saved on commissions is just as important as money earned on a solid stock pick!
The Best Online Brokers: More Brokers, Based on Reader Feedback
Now, I received dozens of e-mails from you fellow Sleuth readers. Some of you thanked me for taking the time to do this research for you. (I liked those e-mails!). Some of you called me an idiot for leaving your favorites broker off the list (I chuckled at those!). And some of you simply took the time to share personal experiences you had with a number of these brokers (those were my favorites).
I thank you for all of your mail. It was helpful – even the ones that called me nasty names. Bad or good, your feedback is crucial. If you want to see something covered in Sleuth, let me know. Chances are, I will be glad to research or write about it – especially if it can help you become a better investor.
But now, I will update that broker list even further. I will add some of the brokers that I left off last time around – ones that you informed me of personally.
The Best Online Brokers: optionsXpress
OK, let’s get to it. Here are five more online brokers to add to you list…
1) optionsXpress: optionsXpress charges $14.95 for market or limit orders of 1,000 shares or less. (If you trade enough, the fee per order actually falls to $9.95 for 1,000 shares). For orders above 1,000 shares, you pay 1.5 cents per share. There is no minimum balance to start up an account with optionsXpress, unless you plan to trade on margin. (To open a margin account, you must deposit a minimum of $2,000).
To trade penny or Over-the-Counter shares, the fee structure is the same. You pay $14.95 for the first 1,000 shares. And the maximum you can be charged (assuming you buy a lot more than 1,000 shares) is 4% of the total trade.
optionsXpress’ contact inf phone: (888) 280-8020, Web address: www.optionsxpress.com
The Best Online Brokers: Interactive Brokers
2) Interactive Brokers: IB’s commission structure was a bit hairier than most. But it’s worth thumbing through. A lot of Sleuth readers wrote in to me saying this was their favorite broker. So here’s the deal:
They charge $1 to trade 100 or less shares. If you buy more than 100 shares, the commission is $0.005 per share. So if you wanted to buy 1,000 shares, it would cost you $5.
There is a minimum account balance of $2,000 to start an account with IB. And if you are a day trader, you’ll have to pony up $25,000.
The only additional fee you may have to pay is a $10 monthly inactivity fee. (That is waived if you spend enough on commissions and research). To look over the ins and outs of IB’s fee and commission structure, check out this link: http://www.interactivebrokers.com/en/accounts/fees/minimumDeposits.php?ib_entity=llc#commission
To trade penny and OTCBB stocks, IB charges 0.2% of the total price of the trade. So if you buy 2,000 shares of a 50-cent stock, the commission will be $2.
Interactive Brokers’ contact inf phone: (877) 442-2757, Web address: www.interactivebrokers.com
The Best Online Brokers: Lowtrades
3) Lowtrades: Lowtrades is another good little discount broker to take a look at. If you make as many as 401 trades a month, its commission is as low as $2.99 per buy and sell. But if you aren’t that active, here’s the skinny:
If you make between 1-50 trades a month, Lowtrades charges a $5 commission (for both market and limit orders). If you make between 51-100 trades a month, the commission drops to $4.75 a pop. And the more you trade, the lower the commissions become.
For us penny stock investors, commissions are $5 per buy and sell order.
If you decide to open an account with Lowtrades, there is no minimum account balance unless you open a margin or a day traders’ account.
Lowtrades’ contact inf phone: (800) 597-8767 or (202) 466-6890. Web site: www.lowtrades.com
The Best Online Brokers: ChoiceTrade
4) ChoiceTrade: ChoiceTrade has a pretty darn simple commission structure. It’s $5 for everything! It charges $5 per buy and sell order – market or limit. And it’s only $5 for OTCBB and penny stocks.
ChoiceTrade doesn’t have a minimum required balance to open an account – unless you plan on trading on margin or opening a day trader’s account.
If you aren’t an active trader/investor, ChoiceTrade may be a nice fit for you. There is no inactivity or quarterly fee if you don’t make a bazillion trades a month.
ChoiceTrade’s contact inf phone: (877) 731-9114 or (732) 214-2660. Web site: www.choicetrade.com
Editor’s Note about ChoiceTrade: In Barron’s 2005 broker survey, ChoiceTrade received 4 out of 5 stars!
The Best Online Brokers: MB Trading
5) MB Trading: MB Trading is another low-cost broker to keep an eye on. If you buy or sell 500 shares or less, it will cost you a penny per share. So if you trade 500 shares, your commission will be $5. If you trade more than 500 shares at one time, you are charged a half a cent for every share above 500. So if you buy 1,000 shares, your commission will be $7.50.
For penny and OTCBB stocks, MB Trading charges $8.95 per transaction – for unlimited shares.
There is a $2,000 minimum account balance with MB Trading. And if you trade on margin or day trade, the minimum requirements go up to as much as $25,000.
As long as you maintain your account, there is no monthly or inactivity fee to worry about.
MB Trading contact inf phone: (866) 628-3001. Web site: www.mbtrading.com
Editor’s Note about MB Trading: Barron’s gave MB Trading a 4.5 star rating in its broker survey.
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Here are some resources about the Best Online Brokers:
Best Online Trading Broker Websites — Find out which online trading sites are doing the best job.
ConsumerSearch — Online Brokers Reviews: Product Reviews Comparison Reports
Dogs of the Dow — The top dog brokers sniffing out the market.
MSN Money Extra — Which online broker is best for you?