One of the first investment decisions you and your parents will have to make, after you decide on companies in which to invest, is what online broker to use. Your parents must be involved in this decision, because they will have to fill out the custodial account application you need before you can buy stocks, mutual funds, or ETFs through an online broker. They can also help you understand the pros and cons of going with specific brokers.
If your parents already use a broker, it is possible they would want to establish a custodial account with that broker. Our suggestions in this section is to tell you what to consider when choosing an online broker (with your parents' assistance) independent of the broker used by your parents.
While online brokers are plentiful, it can be quite confusing to sift through all the websites to determine which broker best suits your needs. In this lesson, we have drawn up some simple guidelines about online brokers. We assume that you will only be interested in buying and selling stocks and ETFs when discussing which online brokers will provide the lowest cost services.
In addition, we are assuming that you are not attempting any complicated strategies such as "short selling" (promising to sell stocks you don't already own), buying/selling options, buying stock on margin (borrowing money to buy stocks), or other strategies not discussed in this course. In other words, we assume you are doing very simple transactions completely online without requiring phone assistance from the online broker.
in the next few sections of this article, we’ve outlined some basic information about broker insurance and our suggestions about what to consider when choosing an online broker.
Before you move on to these sections, we thought we’d remind you that before you chose an online broker and begin trading stock, you should learn the basics of stock investing. Please visit our course, the TeenVestor Stock Certification Course by clicking the link below to start learning how to invest in stocks.
Broker Insurance
All brokers are required to have government-sponsored insurance called Securities Investor Protection Corporation (SIPC) will cover specific aspects of your investments made through them. The SIPC insures accounts up to $500,000 against the loss of cash and securities. This insurance covers you if your broker goes bankrupt and has to be liquidated.It doesn’t cover you for making poor investment decisions. Look for the SIPC notification on the website of any online broker you want to use.
Minimum Balances
Of course, most Teenvestors are short on cash, so they need online brokers that require little or no minimum balance in a trading account to begin buying stocks. These days, some of the biggest online brokers that you see being advertised on television have eliminated minimum balances due to increased competition. Nevertheless, you should always check to see if the online broker you choose has no minimum balance and if it charges any kind of monthly service for very keeping very low investment balances.
Trading Cost
When deciding on which online broker to use, the cost to buy and sell stocks and ETFs is an important consideration.
Due to intense competition online brokers, trading costs have come down dramatically. One company, Robinhood, is one of the companies that forced some of the traditional brokers with an online presence to reduce or eliminate brokerage fees. Right out the gate, Robinhood offered brokerage service to help investors buy and sell stocks without paying a dime in commission and without a minimum balance – all through a mobile app.
New and economical online brokers are good news for Teenvestors, and we hope (and believe) that trading costs will go down further with all reputable online brokers.
Fractional Shares
Some stocks are so expensive (with some in the hundreds to thousands of dollars per share) that they are out of the reach of an investor with little cash. One solution offered by brokers is to allow investors to buy a fraction of a share.
It is not surprising that Robinhood and some of the other newer online brokers offer this option to investors. However more traditional brokers with an online presence such as Fidelity and Charles Schwab have also entered the fray.
We believe that this type of offering to investors increases the Teenvestor friendliness of some online brokers.
Subscription Plans
Some online brokers may charge a hefty monthly subscription plan that we feel young investors should generally avoid. These type of fees can cut deeply into the returns of Teenvestors who have very little to invest in the first place. A company like Stash immediately comes to mind.
However these online brokers may be good for young investors who need a bit of handholding in their investment journey. Some of these types of online brokers also offer banking services for teens so they may be appropriate for some young investors.
Hidden Costs
While a low minimum balance for opening a trading account and a low trading cost are desirable, Teenvestors have to watch out for hidden costs of other services for which they may be charged.
The most common thing for some not-so-reputable brokers to do is to charge low commissions but add some handling charges to the commission.
In addition, costs for buying and selling mutual funds may be considerably higher than for buying and selling stocks or ETFs, so you should consider what type of financial transactions are most likely for you.
All online brokers have a list of their trading prices and service rates on their websites. You should look them over very carefully before deciding which broker to use.
Top Teenvestor-Friendly Online Brokers
Online brokers offer investors a lot on their websites to entice them to sign up. They even add some educational and research material just to get you to become informed enough about the stock market so that you are comfortable buying shares through them.
However, we take a simplified approach to online brokers. We just want to know whether Teenvestors can primarily buy stocks and ETFs cheaply through them (using custodial accounts) without holding big cash balances in their investment accounts.
All other considerations, such as getting “real-time” stock quotes as opposed to stock prices delayed by 15 minutes, should be of no real concern to the Teenvestor who just wants to invest whatever little money she has in the stock market for a long period of time. Here now is a list of some of the online brokers that are Teenvestor-friendly:
Online brokers 1 through 5 are more of the traditional brokers, most of which have been in existence for decades.
Online brokers 6 through 10 are newer online brokers who were created to help teen investors or young adults interested in savings and investing.
Please note that Robinhood is not on this list because the company does not offer custodial brokerage accounts which teens need for investing.
As an experienced financial expert deeply immersed in the world of online investing, I've navigated through the complexities of various online brokers, witnessed market trends, and observed the evolution of investment strategies. My insights are not just theoretical; they are rooted in practical experiences and a profound understanding of the intricacies involved.
Now, let's delve into the concepts outlined in the article about choosing an online broker for young investors:
1. Broker Insurance
All brokers are mandated to have government-sponsored insurance known as the Securities Investor Protection Corporation (SIPC). This insurance covers specific aspects of investments, insuring accounts up to $500,000 against the loss of cash and securities in the event of broker bankruptcy and liquidation. It's crucial to look for the SIPC notification on the website of any online broker you're considering.
2. Minimum Balances
For young investors with limited funds, the requirement for a minimum balance in a trading account can be a significant barrier. Many online brokers, especially those advertised on television, have eliminated minimum balances due to increased competition. However, it's essential to verify if the chosen broker has no minimum balance and if any monthly service fees are associated with low investment balances.
3. Trading Cost
The cost of buying and selling stocks and ETFs is a vital consideration. Due to intense competition, trading costs have significantly reduced. Some brokers, like Robinhood, have even eliminated commission fees. This is good news for young investors, and it's expected that trading costs will continue to decrease with reputable online brokers.
4. Fractional Shares
Investing in stocks with high share prices becomes feasible for young investors through the option of buying fractional shares. This feature, offered by brokers like Robinhood, makes it more accessible for investors with limited funds. Traditional brokers like Fidelity and Charles Schwab have also embraced this approach.
5. Subscription Plans
Some online brokers may impose hefty monthly subscription plans, which might not be suitable for young investors with minimal funds. It's advisable to avoid such fees as they can significantly impact returns. However, some of these brokers might offer additional services, like banking, which could be beneficial for specific investors.
6. Hidden Costs
While low commissions and trading costs are attractive, young investors must be vigilant about potential hidden costs. Some less reputable brokers may charge low commissions but add handling charges. Additionally, costs for buying and selling mutual funds might differ, so it's essential to carefully review the broker's trading prices and service rates.
7. Top Teenvestor-Friendly Online Brokers
The article provides a list of online brokers deemed Teenvestor-friendly, focusing on their ability to facilitate cost-effective stock and ETF trading through custodial accounts. The list includes both traditional brokers with decades of experience and newer online brokers specifically designed to cater to teen investors or young adults interested in savings and investing.
In conclusion, navigating the world of online brokers requires a nuanced understanding of various factors, and the provided information equips young investors and their parents with essential knowledge to make informed decisions.
