This is a guest post from Dong, who writes about personal economy at Ask Dong.
Who can forget their first time? I certainly can't. I was 22 and fresh out of school. The NASDAQ was around 4000, and young turks like myself were getting jobs that we had no business holding. The times were good. Even if I couldn't work for a dot-com, there was no reason for me not to invest in them. The world was my oyster.
I opened my first real brokerage account with only one in thing in mind — I wanted the cheapest trades possible. At the time, Datek offered the best price at $9.99 a trade. This wasn't my first account, but it was my first account as an adult.
While my choice of Datek back in 1999 wasn't a bad one, I realize in hindsight that I didn't go about choosing a broker in a particularly systematic manner. Today, the options are more numerous, and the services provided more comprehensive, but there are still the same factors to keep in mind, including:
- Cost: Trading costs, account maintenance costs.
- Mutual fund selection: Number and variety of no-load mutual funds.
- Investor research: Access to different analyst reports, robust graphing options.
- Customer service: Are service representatives easily reachable and well-informed? Does it cost extra to talk to someone?
- User interface: Easy to use? Easy to navigate?
- Customer reports: Profits and losses are easy to discern. Reports are up to date.
How one weighs each of these factors is a matter of personal preference and need. In my view, there are basically four types of investors. I've listed them below and ranked in order the factors to consider, from most important to least important.
Completely clueless investors
A clueless individual isn't an investor per se, but rather someone who needs access to a lot of educational resources. Even if someone decides to be a relatively basic investor, and invest only in index funds, that someone should understand the decision to do so. I think it's great to follow a tried-and-true method of investing like using index funds exclusively. But to do so without any education is still foolish.
Important factors for new investors are: customer service, user interface, cost, investor research, mutual fund selection, customer reports.
Passive index fund investors
This type of investor doesn't need much out his brokerage company — mainly free access to cheap index funds. Because someone who subscribes to the Bogle way of thought is all about reducing costs, index mutual fund trades must be free, but other trading costs might be irrelevant. Some of these investors may employ the use of ETFs (exchange-traded funds), and therefore would want low-cost stock trades. Other than investments made on a regular periodic schedule, which would likely be done via a free mutual fund, the overall level of trading on such an account should be minimal.
Index fund investors would rank the factors like this: mutual fund selection, customer service, cost, user interface, customer reports, investor research.
Value investors buy individuals stocks and mutuals funds, but are not active traders. They buy and hold, but not forever. Fundamental research is important, but fancy graphs and technical indicators are not. Reporting is important but trends are measured in quarters and years, not days. Trading costs are important but not as important as they would be for an active trader.
For value investors, the factors in choosing a brokerage are: cost, mutual fund selection, investor research, customer reports, user interface, customer service.
Active traders don't hold positions for extended periods. What's important to them is the ability to trade different products, and to do so cheaply. A good and easy-to-use interface is important. Also, reporting features, especially ones that measure daily performance, are important.
Active traders consider the following important: cost, user interface, investor research, customer reports, customer service, mutual fund selection.
Like anything else, it's important to know thyself. Know what kind of investor you are and what kind of investor you might become. Opening a brokerage account isn't unlike investing; read what the experts have to say and still do your own research.
The options today are more numerous and varied than they were for me in 1999. Some brokerages, like Zecco, offer “free” trades for most small investors. Others, such as Bank of America and Wells Fargo, offer free trades for customers who do substantial business with the bank. However, as I've learned, trading costs aren't everything — knowing what you want and need is.