There are dozens of brokerages online that suddenly make investing easy, at the touch of your phone screen.
Gone are the days when you need to set yourself up with a human stockbroker and get them on the phone every time you need to make a trade. Now, you can buy and sell stocks within minutes from the comfort of your own home by simply using a phone or computer.
There is still value in considering the best option for yourself, though. Do you want to have quick mobile access to equities at low commission rates? Or is it better to have a human broker and the expertise associated with them?
Should I Use an Online Broker?
With the recent surge of retail investors looking to test their hand in the market, online brokerage apps have spiked in popularity. With quick access and low cost, they seem like a no-brainer, right?
Let’s investigate the advantages.
- Little to no commissions and fees, making day trading a lot more affordable
- Prompt access to buy and sell functions
- Live access to portfolio performance and buying power
- Live access to unrealized gains/losses
- Little to no minimum buy–ins
Although the general idea of brokerage apps is fairly consistent, there are a few differences between them all. For example, Questrade is super user-friendly, and great overall for beginners and intermediate investors alike. Wealthsimple is another straightforward, easy-to-use option that offers zero-commission trades. Qtrade Investor provides more comprehensive research and education features. TD Direct Investing has diverse trading tools that allow you to explore more advanced methods. Interactive Brokers is an advanced broker app that is deemed the most ideal for professionals (you may feel like a stockbroker yourself while using it!).
Fair warning, while some of these apps are commission-free, there have been instances of certain apps being exposed for shifty practices regarding making up for that lost revenue. A popular online broker app last year was found to have been passing on trade execution to large market makers and institutions, while charging them for the privilege of executing these trades. Knowing exactly what the app’s users are going to trade poses an advantage for market makers to manipulate the market in an unfair manner. This practice is called frontrunning and goes against regulation.
How About a Human Broker?
Now, when thinking about registering with an actual stockbroker, many times it seems intimidating. There are many popular stories about stockbrokers making a killing off commissions (whether you win or lose), with outrageous fees for buying and selling, then pushing people to invest in lousy deals, and on. Luckily, the brokerage industry has been regulated quite a bit since The Wolf of Wall Street days, and you’re more likely to be in better hands now than ever before.
- Professional advice – stockbrokers must be licensed
- Access to private placements (buying shares of a company before they are public, often at a desirable price)
- KYC (Know Your Client) forms are mandatory, allowing them to provide you a customized investment plan, with specific goals
- Access to all kinds of stocks, fewer limitations than an online broker
- Comprehensive portfolio analysis
- Detailed documents mailed to you regularly, making filing taxes and such things easier
Stockbrokers have an obligation to vet your income and assets for certain types of trading, to ensure you aren’t trading outside of your reasonable risk range. Basically, they ask you to prove that you have enough
While some online brokers restrict the trading of riskier securities (such as super small cap penny stocks), brokerage firms allow a lot more lenience when it comes to these kinds of high risk, high reward stocks (provided your KYC allows it).
Perhaps the biggest upside when using a stockbroker is access to private placements. It is often only through brokerage firms that you can access shares of a company before it hits the market. Buying private placements is often a surefire way to increase your chances of a 10x return. Don’t we all love 1000% returns?
Can I Use Both A “Human” And A “Robot” Broker?
Without a doubt, and it’s often recommended to gain exposure to the positives without needing to deal with the negatives each time.
Stockbrokers often charge a much higher commission (upwards of $100 flat rate per trade), and transition to a % of the transaction after a certain threshold of dollar volume. While this seems costly for day trading, especially while trading with a smaller account, the costs are minuscule when buying and holding quality companies and private placements. If you hold a $5,000 position and grow it to $20,000, a few hundred bucks on $15,000 of profit doesn’t seem like much.
However, if you are using amounts such as $500 – $1000 to buy and sell stocks rapidly, often opening and closing positions within the day, you may want to open an online broker app on your phone to avoid draining your account with commissions.
It’s wise to diversify trading styles. A common method is holding a stock you believe in with a stockbroker (perhaps even one you acquired pre-IPO!) and day trading that same stock on your online broker. By utilizing both long- and short-term trading strategies, you trade in a cost-friendly manner.
We hope this has given you some insight on how to use both online brokers and stockbrokers in their own respective benefits. Be sure to do research on different broker apps to find the right one that suits you.
More importantly, be sure to have a good relationship with your stockbroker. They should be someone you trust. Do not forget to do a little bit of digging on the firm they represent as well, as these little details go a long way when trusting your hard earned income with someone else!