Choosing a Broker as a Small Trader

As a small trader, one of the keys for success is to chose wisely your broker.  It can be the difference on making money for yourself with your trades, or end up you working to make money for the broker.  Indeed, you may be right on all your stock picks, but fail to be profitable due to the broker's high commission.  This is particularly important if your investment capital is reduced.

Broker selection criteria

First we will discuss the factors to take into account to select your broker.

1	Internet Service.  This is a must, as you intend to do your trades by yourself.  Also, any other way of trading (such as phone orders, etc) will imply significant costs, normally starting on US$ 19 per trade. Practically all discount brokers offer this service, and it's the key of their low costs.
2	Execution speed.  This will determine the quality of trade that you got. A slow execution speed will normally imply obtaining always a price worst than expected.  This is particularly important in volatile market conditions.
3	Commission costs. The most important factor to consider.  If you are a small trader, with a capital around US$ 5000, then you must have a commission schedule that may reduce near to zero your trading costs. Have in mind that this will depend also on the type of trades that you intend to do (stocks or options?). Consider also the maintenance and/or incativity fees applicable (monthly or yearly), as well as the costs for fund or withdraw money for the account.
4	Orders flexibility.  For the strategy that we propose, it is important that the broker offers a rich flexibility on the type of orders processed. The basic order types are market orders, limit orders and stop orders.  All brokers will offer that, but have in mind that some will charge you an extra fee for limit or stop orders.   Day orders and Good Till Cancel (GTC) orders are normally offered by everyone, but some brokers in addition provides the capability of activating orders after certain date/time.  Some more advanced order types are trailing stop orders and conditional orders. These last type of orders can be very useful for implementing autopilot strategies.
5	Margin / Cash account. We recommend establishing a margin account, which will increase your flexibility by allowing you to short-sell stocks, as well as allowing leverage your capital.  This normally increases the amount required to open an account.
6	Cash management facilities.  The idea of trading is to make money in the market, and then withdraw money from your account.  Be sure to find out the cost of withdrawing money from your account, as well as the applicable restrictions.

We have made the research and have selected a list of brokers more suitable for small investors. They are presented below in strict alphabetic order:

Broker	Web page
A.B. Watley Direct	www.abwatley.com
Firstrade Securities	www.firstrade.com
Interactive Brokers	www.interactivebrokers.com
Investrade Discount Securities	www.investrade.com
MB Trading	www.mbtrading.com
Online Brokerage Services	www.mytradz.com
Scottrade	www.scottrade.com
Sogoinvest	www.sogoinvest.com
Tradeking	www.tradeking.com
Zecco.com	www.zecco.com

Find below a comparison between these brokers, based in their public information available. When some information is unknown, it will be marked with a question mark (?).  All amounts are in US$.

Disclaimer: This information is presented for informational purposes only. We have done all our efforts to verify the information, but we cannot guarantee it is fully accurate. Please confirm with the broker all the information presented here before opening an account.

Account Open / Maintenance

Firstrade Securities and Tradeking have no entry barrier (zero minimum), and Interactive Brokers has the upper level to open an account. All others are around US$ 2000. 5 out of 8 offer their service with zero maintenance costs.

Investrade Discount Securities has some additional minimums when trading options:

 Minimum for Naked Puts: US$ 20,000
 Minimum Naked Calls: US$ 100,000

With this policy, this particular broker is excluding in practice the small trader for options trading (at least, for the strategies we propose.)

Trading cost

There are two possible basis for trade commissions: Flat and per share.  As a small trader, you will normally trade few shares, and therefore a per share basis will be preferable.  In options trading, the commission start with a base plus an additional cost per contract. In the table this is shown as base price + contract price.

The following examples illustrates the commission costs for typical small trader transactions. We have considered that the amount to stake will be grossly a third of his capital, around US$ 1500 (actually, this is more than we may advise initially, but it illustrates the point).  The transactions are (a) buy 50 shares priced in $30 (limit order), and (b) buy 5 calls, which means you will be controlling 500 shares with these 5 contracts.

In the example, Zecco.com offers the lowest commission for a US$ 1,500 investment in shares (zero!), followed closely by Interactive Brokers.  For options, Interactive Brokers has the lowest cost in options trading. 

Please note that Interactive Brokers, on the other hand, has a flat monthly cost per maintenance of US$10.  Depending on the monthly quantity of trades you intend to do, it will worth to pay that fee.  If you make four or more trades a month, your costs will remain lower with Interactive Brokers pricing schema.

Zecco.com is an interesting case. They offer  . Yes, they charge zero in commission for shares, but do have a commission for options, which are very competitive.  How can they do that? They claim they make money based on the interest of the deposit, and yes, also make money with options trading commission.   As we suggest to do some trading in options due to the leverage that can be achieved, they seem less attractive for us.  However, if you plan not to trade options, but just stocks, for sure Zecco.com is the choice.

We are not Zecco's customers, so we don't have an opinion on other aspects as execution speed, quality of service, or automation capabilities.  Nevertheless, we are certainly impressed with their price policy and intend to become their customer in the short term.  (After all, zero cost is certainly irresistible.) Once we can comment on their service by actually using it, we will share our experience thru this page.

We do have used Interactive Brokers for about three years, and we can say that they have an excellent execution speed, reasonable good service level, and very powerful possibilities for trading automation using APIs.

Miscellaneous information

In the table we show some other costs to have in mind.  As a successful trader, you should be pulling money out of the market. Ideally, you should be withdrawing money once a month. If this is the case, then Interactive Brokers has the best deal on this, because they charge you zero for the first withdraw of the month. 

In all other cases, this has also a  cost, and if you live overseas, the cost in some cases the cost is higher.   Almost all brokers accept foreign customers. Tradeking, aside of not accepting foreign customers, charges US$ 50 for incoming foreign wires transfers.

Another important aspect is the order flexibility.  Here, the information publicly available is limited. Four of the brokers does not disclose this information. All the others accept trailing stops, which is the smartest way to "let the winners run" as the old market adage advises. Also, some brokers offers the ability to automate the trading, which can be very advisable for small traders with almost no time to trade live.

Personally, we use Interactive Brokers for our trading.  Do your own homework and make your decision.  Remember that this is a key decision:  By keeping low your trading cost you will have a good advantage, as your trading mistakes during the learning process will be less painful. 

Good trading!

Note: If you are a customer of the abovementioned brokers and you detect something incorrect, or if you can provide information that is missing (marked as "?"), please write to contact@thesmalltrader.com.