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What is an online stock broker?
A web-based stock broker, also known as a direct-access broker, provide you with access to the stock market for buying and selling shares in businesses around the world. They execute buy and sell orders on your behalf through an online trading platform and provide you with the tools necessary to make your own investment decisions.
With the rise of the internet, the role of a traditional stockbroker has largely been replaced by computers. These online stock brokers allow traders to buy and sell stocks with the click of a button, meaning everyday investors are unlikely to interact with a human.
While online stock brokers don’t provide any investment advice and leave the technical analysis and trading up to you, Robo advisors are a bit different and more akin to the services of old style stock broker. A robo advisor is an online platform that tries to replace the role of a traditional financial advisor. Using AI and sophisticated algorithms, robo advisors allow you to put your investment decisions on autopilot as they will automatically manage your investment portfolio.
Are online stock brokers safe?
Yes, it is safe to trade stocks with an online broker, assuming you choose a regulated and trusted broker. Brokers go to great lengths to ensure they are providing a safe and secure trading environment for their clients. This includes adhering to stringent procedures put in place by regulatory bodies including ‘Know Your Customer' (KYC) and Anti-Money Laundering (AML).
In addition, brokers are required by law to protect your money. Client money is kept in a secure, segregated fund away from the broker's own money, meaning it is never at risk in the unlikely event of the broker going out of business.
In the UK, traders are provided with an extra layer of protection by The Financial Services Compensation Scheme (FSCS), which protects deposits of up to £85,000 in the event of the broker's insolvency. Some of the most trustworthy brokers operating in the UK that are regulated by the FCA include:
Can I buy stocks online without a broker?
There’s no unwritten rule that says you have to use an online broker in order to buy stocks. There are plenty of traders, keen to avoid trading commissions, that choose to buy stocks though direct investments and mutual funds.
However, this involves a lot more groundwork on your end. Many large companies allow you to avoid online brokers by buying directly from them. Often connected with dividend reinvestment plans (DRIPs), this involves researching which companies allow you to buy stocks directly and contacting them yourself.
For many traders, the benefits of using an online stock broker far outweigh the almost negligible savings you’d make by avoiding them.
Online stock broker advantages
Affordability
Online stock brokers have made buying and selling stocks affordable for every trader – regardless of the size of their account balance. Dealing costs have decreased considerably over the years as brokers compete for business, while it is no longer necessary to pay an expensive middleman or full-service broker to make investment decisions on your behalf.
Flexibility
When it comes to stock trading, time is of the essence. Economic events and news can cause markets to nosedive or rally at a moments notice. Online stock brokers allow you to execute trades immediately through their trading platforms, with some helping you stay ahead of the curve by providing built-in features such as economic calendars and live news feeds.
Opportunity
Online brokers allow you to invest and choose the best shares in businesses around the world drawn from every imaginable sector. Thousands of shares are available at your fingertips that you can buy with a simple click of a button. Online brokers do the heavy lifting so that you don’t have to by providing historical price charts and even market sentiment towards a particular stock. Without an online trading platform, traders would have to spend hours manually researching and selecting stocks.
How do online stock brokers make money?
In exchange for providing you with access to the global stock market and executing your orders, some online stock brokers charge a commission per trade while others will charge a spread.
The ‘spread', or difference between the buying and selling price of a stock, is the most common and popular way of making money for brokers. On top of the spread, some brokers charge a commission on each transaction, although this is typically reserved for (Electronic Communication Network) and STP (Straight Through Processing) trading accounts.
Many brokers that claim to offer ‘commission-free trading' typically end up making their commission by widening the spread on trades. Learn more about how brokers make money in our guide to brokerages fees.
Choosing the right online stock broker
With a dizzying number of online brokers competing for your business, how do you begin to tell them apart? Here are a few pointers:
Regulation
For many traders, regulation and security are often the first thing they’ll look at. It's important to find a trusted online stock broker that is fully regulated by one or more of the leading regulatory bodies around the world. Regulators play a critical role in protecting your interests and maintaining an important system of checks and balances. All of the best stock trading platforms will be regulated by at least one of these authorities, including:
- FCA, PRA (United Kingdom)
- NFA, CFTC (United States)
- ASIC (Australia)
- CySEC (Cyprus)
- DFSA (Dubai)
- FSCA (South Africa)
Payment methods
Many of the best online stock brokers offer a number of ways to fund your account including bank transfers and e-wallets such as PayPal, Neteller and Skrill. A wide variety of payment methods means more ways to deposit and withdraw money, so it’s worth looking for a broker that supports your preferred payment method.
Withdrawal times
As a trader, there’s nothing worse than waiting to get your hands on those hard-earned profits Unfortunately, withdrawal times vary from broker to broker; while some brokers offer instant payment processing, others will take anywhere between 1 and 3 business days to process your request. A good broker shouldn’t make you wait longer than necessary, so we recommend choosing one with quick processing times.
Minimum Deposits
The amount you’ll need to deposit into your account varies across brokers. While some have account minimums of £200, others allow you to get started with as little as £10. The important thing to bear in mind here is how comfortable you are with the required minimum deposits.
For example, if you’re new to trading then it may be worth opting for a broker with lower account minimums, or at least testing out the demo accounts of those brokers with higher deposit requirements before you commit to one.
Trading Fees
As we already know, most brokers make their money off the bid-ask spread and commission fees. However, it's always a good idea to take a look at other trading-related fees including currency conversion, withdrawal and overnight funding fees.
Non-Trading Fees
It’s not unusual for traders to get stung by various non-trading related fees such as account maintenance and inactivity fees. These fees are often buried deep in a broker’s terms and conditions and can lead to unexpected charges that can quickly add up. We recommend saving yourself stress further down the line by choosing a broker that is transparent about their fees.
Trading platforms
Not every broker is equal when it comes to what trading platforms they offer. While many traders prefer to use third-party platforms such as MetaTrader over a broker’s own in-house platform, not every broker licenses MT4 or MT5 (or both) for their clients. So, if MetaTrader support is a potential dealbreaker for you, it’s worth checking to see if your preferred broker offers it.
Another thing to consider is your own ability level and what you need from a trading platform. Are you an experienced trader that needs an arsenal of technical analysis tools and add-ons such as economic calendars? Or are you a beginner looking for a platform to learn the ropes.
Some key questions to be asking yourself include:
- Does it offer technical analysis and charting tools?
- How easy is it to use?
- Is there a mobile app available for trading on-the-go?
- What useful features are available? (news feeds, economic calendars)
- Do they offer a demo account with no expiry date?
The best stock trading platform is the one that optimally fits your needs. Whereas some trading platforms are more basic than others and clearly geared more towards beginners, others are best suited for more experienced traders.
Customer support
For some traders, the customer service offered by a broker is an important part of their decision making process. If they have any questions, they want to feel assured that their broker can help them solve their problems.
While some brokers prioritise customer service and aftersales support, others are less engaged once you’ve opened an account with them. The question is: does this matter to you?
At a minimum, support should be available 24/5 and there should also be a variety of ways to get in touch with the customer service team. If English isn't your native or preferred language, any top online stock broker will offer support in a number of languages.
Educational Resources
An often overlooked benefit when comparing brokers, especially for beginners, is the library of educational content that a broker provides. Many of the best stock trading sites provide their customers with a wealth of educational resources, from how to use their trading platform to how to make your first trade and more. If you’re just getting started and wondering how to trade stocks, you’ll find basic and more advanced trading techniques to help improve your chances of success.