Which stock broker should you use?
🤔 This is another post in a set of posts on options trading. If you are new to options trading, you may want to start with some of my earlier posts.
One of my sports coaches in high school used to say: “It’s not the tool, it’s the fool.” This was his reminder that when something goes wrong in the game, it’s usually the fault of the person and not the equipment.
However, when it comes to investing, your choice of brokerage can be critical. There are many factors to consider. My focus in this post will be brokerages for US-based traders.
In the end, every broker gives you access to trade various things in the market, including options, equity, futures contracts, and more. They are often different in many areas.
Data and research
Start by looking at the data that a brokerage provides for your trades. I usually look for the following:
- Stock calendars that include earnings dates, product events, and other stock events.
- Information about company financials and SEC filings.
- Real-time quotes for equities and options. (Extremely important.)
- Charting with technical analysis, such as moving averages.
- Watchlists for your favorite stocks.
Try to look for brokerages that put as much of this data in a place that is easy to access. For example, a brokerage that puts earnings event data in the watchlist or close to where you make a trade can help you avoid making mistakes around binary events.
Keep in mind that some brokerages charge extra for detailed research data or they may charge for real-time quotes (especially real-time options quotes). (Costs are coming up later in the post.)
Be sure that the brokerage allows you to trade where you want to trade. If you can’t trade at work on a computer, be sure your brokerage has a good Android or iPhone application. If you can only use a web browser to trade, be sure that the broker has a first-class browser-based experience.
Some brokers have full desktop applications that provide the best experience. Be sure to try out their applications on your computer. Almost every broker with a desktop client works on Windows, most work on Mac, and a few work on Linux. Ensure you have a strong enough CPU with enough memory to run the application well.
For trading, ensure that the broker allows a variety of order types, such as day, good til canceled (GTC), trailing stop, and order cancels other (OCO). Day and GTC orders are what I use about 99% of the time, but trailing stops can be handy for swing trades. If you can do a simultaneous cancel/replace (similar to being able to edit an active order), that’s also a plus.
I enjoy brokers that provide a full confirmation step of the order that allows me to read my potential order in plain English along with potential risks and profits. Everyone has made mistakes on an order from time to time, but you certainly don’t want to get caught selling a call when you meant to sell a put. 😬
Most traders won’t need to use the customer service team at most brokerages since these platforms are built for traders to do as many things as possible on their own. After all, it is expensive to staff a large customer service team to do things that traders should be able to do by themselves.
Sometimes things do go wrong and that’s when things get complicated. Early assignments on sold options have caught me by surprise in the past and I’ve used customer service agents to ensure I handled the exercise process carefully.
When you get into a difficult situation and lots of your money is on the line, do you want someone you can call immediately? Is an email ticketing system enough for you? How about live chat as an in between option? Decide what is important to you and choose a broker with the right customer service options.
Live chat is acceptable for me but I prefer a toll-free number to call.
Look for brokers that make it easy to connect a bank account for deposits and withdrawals. Some brokers will give you a portion of your deposit to use while the remainder clears. Some may give you all of your deposit to trade immediately, but you can only buy stock with it until it clears.
Read the fine print for your broker to ensure you know how long it takes for deposits and withdrawals to clear. Be sure to read about any potential fees for moving money. If you have more than one account with the broker, find out what is involved with moving money (and stocks) between your accounts.
Find out if the broker sends orders directly to the exchange or through a third party. Third parties can reduce cost, but they can sometimes add delays to trades or cause them to be executed at prices which are not the best.
When you are buying and selling stocks with limit orders, the difference here could be a few pennies or less. However, if you’re buying stocks in groups of 100 or more, those pennies add up quickly. For options, a $0.05 price difference is $5 worth of profit (or loss)!
Poor trade execution can cost a whole lot more than the fees from a brokerage with better execution. 💸
I saved the discussion of cost for last because there are a lot of factors involved here. Many low cost (or no cost) brokers are a great deal for certain trades. Others can be terrible. Lower cost doesn’t always make sense.
When I analyze a brokerage’s costs, I ask questions like these:
- Can I get detailed company research for free?
- How much does it cost to get real-time quotes for stocks and options?
- What is the cost per equity or option trade?
- If I get assigned stock on a sold option, what fees are involved?
- What fees to I pay to exercise an option?
- Will my costs go down as I make more trades?
Some brokerages have special fee structures where you can avoid certain fees based on how you trade. As example, Fidelity does not charge me an options fee if I buy back a sold option for $0.65 or less. If I sell an option for $1.50, I enter a buy order for $0.75 most of the time (to collect 50% profit). However, I can save about $0.70 per trade if I bump that buy order down to $0.65. Read all of the fine print! 🤓
My experience with brokerages
I’ve tried quite a few brokerages as I’ve learned to trade options and here are my thoughts for each with my most preferred brokerages at the top of the list. I currently use TD for almost all of my trades and I use Fidelity to trade options in my HSA.
TD Ameritrade / ThinkOrSwim
TD checks a lot of boxes for me. The full ThinkOrSwim desktop client works solidly on Linux, their Android applications are easy to use, and their web interfaces are straightforward. Options trades are $0.65 each, but the direct trade execution is totally worth it. There’s no fee for being assigned.
The desktop application is full of data and it is completely and utterly overwhelming at first. It takes time to learn the system and where you can find all of the things you need. Over time, it becomes much easier to find information and make trades. The charting is incredibly detailed and quick to render.
The trade confirmation process at TD is really good and I’ve caught some mistakes in the confirmation process. Real-time quotes are included for free and the updates are fast. You can configure the update rate to make it less dramatic.
TD and ThinkOrSwim give you a one-stop shop. You can do all of your trading, screening, and research all in one place. Their customer service is a toll-free phone call away or you can use the live chat that’s built into the ThinkOrSwim application.
If your goal is to purely trade options, Tastyworks is a great platform. You can buy stocks, too, but that’s not their top priority. Their order entry process for options (buying and selling) is superb and I’ve never found one that I liked better.
Once you place your trade, you can put in a 50% profit order with a couple of clicks. Tracking your trade’s process is done with a handy progress bar.
Trade execution is really fast and the pricing structure is interesting. You pay $1 per option trade to open with a $10 maximum fee. Closing the trade is free. If you get assigned, there’s a $5 fee.
The real downside about Tastyworks is the mobile experience. The Android application is really difficult to use and everything oddly abbreviated. One could argue that you shouldn’t do much of your trading from a mobile device, but I do like to adjust trades on the go from my phone.
Another complaint I have is that transferring money or equities between multiple accounts must be done with signed paper documents. It’s not possible to do the process online. With other brokers, such as TD or Fidelity, you can do this instantly via self-service processes on their websites.
You will need to do your research somewhere else. Tastyworks has charting and tracking of earnings dates, but that’s about it.
Fidelity has full desktop client, but it does not run on Linux, so I haven’t used it yet. Their website works well, although it is pretty basic.
Their trade execution is quite fast and I often find that they improve my limit order price by $1-3 on each option contract. The fees per option trade are around $0.69 and that’s fairly close to the industry standard $0.65.
There are some research and charting tools on Fidelity’s website, but I prefer to do my research elsewhere.
Say what you will about Robinhood, but it’s an all around decent brokerage. You can get extra research data, real-time quotes, and margin for just $5 per month. Stock trades and options trades are free (but there are some small $0.01-$0.02 clearing fees for some trades). Even OTC trades, such as NTDOY, are free.
My main complaint about Robinhood is around trade execution. I usually set my limit orders on options trades near the mark price (halfway between bid and ask). I often have a difficult time getting an option trade to fill unless I adjust the price close to the bid. This isn’t a problem on TD or Fidelity. Spending $0.65 for TD’s better execution makes sense when I’m losing $1-2 per trade on Robinhood due to bad fills.
Robinhood’s customer service has always been superb, but it’s only available via email. I was sweating through an assignment on a put credit spread one Saturday morning and I was able to get a reply in a few hours with the right advice.
Their Android and website interfaces are superb and fast. When trading gets really busy, the website often lags and it can be difficult to enter trades. I’ve found it difficult to get trades done during the first 15-30 minutes of the day. In some situations, my trade has already executed but the website doesn’t show it.
Webull is another low/no-cost brokerage. Their Android and website interfaces provide some great ways to get research donw fast. They present a ton of information in a small amount of space that would normally require a lot of legwork at other brokerages. I often use my Android Webull app for quick research and charting.
As with Robinhood, trade execution is a challenge. Also, I got into a few situations where I couldn’t enter a GTC order for options trades.
You can’t queue orders outside of certain hours either. Sometimes I would want to adjust an order right before going to sleep but I wasn’t allowed to change my queued order until the next morning just before the market’s open.
Disclaimer: Keep in mind that I am not an investment professional and you should make your own decisions around stock research and trades. Investing comes with plenty of risk and I’m the last person who should be giving anyone investment advice. 😜
Photo credit: Edan Cohen on Unsplash