Most Teenvestors can’t afford to go to full-service brokers to buy or sell stock. This section tells you what you should know about the more inexpensive online brokers you are likely to find.
You should look into the services of the brokers in the list below. They are the most affordable online brokers that that we can find. They generally offer low-cost basic trading services, low minimum balance requirements, and low in-activity fees.
Affordable Online Brokers
Market & Limit Orders
Teenvestors should know the difference between a market order and a limit order. If you want the broker to buy a stock for you at whatever price at which that stock is being sold, this is called a market order. On the other hand, if you tell the broker that you don’t want to pay more than a certain amount for a stock, this is called a limit order. Limit orders cost more than market orders. You would request limit orders for stocks that move up and down quickly (that is, stocks with a high Beta). Find out what your broker charges for each type of order.
The difference between market and limit orders can be as much as $5 for some online brokers. As a beginning investor, you should buy stocks that are stable – i.e. low Beta stocks – at least for your first few transactions. In this way, you can put in market or-ders without the fear of the stock price increasing on you by the time your online broker processes your transaction.
Fees & Requirements
As the online brokerage market has evolved, online brokers have developed more complicated pricing structures. Make sure that you visit the the "Pricing" or "Fees" section of an online broker's website. Every online broker is different, and a Teenvestor should chose a online broker that fits his or her needs.
Minimum Starting Balance (or Minimum To Open)
While the "minimum starting balance" requirement is not a fee, it is the first thing a Teenvestor should check for. A minimum starting balance is the minimum amount of money that an online broker requires for you to open an account with them. For example, both Charles Schwab and E*Trade have a minimum starting balance of $1,000. Fidelity has a minimum starting balance of $2,500. OptionsXpress has no minimum starting balance. However, even in the case of online brokers that do not require a minimum balance, there are still plenty of other fees to look out for. In fact, the lower the minimum starting balance, the more likely it is that there are fees elsewhere.
All online brokers charge a commission, a fee for each order that you place. Furthermore, a broker's commission may change depending on the size of the order or the type of order (market vs limit). For example, Scottrade charges a $7 commission for both market and limit orders. OptionsXpress also charges 14.95 for both market and limit orders, but only for orders of 1,000 shares or less. For orders over 1,000 shares, you pay 1.5 cents per share. So if you were to buy 1,050 shares of company X stock, the commission would be:
1,050 * .015 = $15.75
Some online brokers also charge a fee equal to a certain percentage of the principal (the money you are spending to place the order) on top of the commission. For example, for stocks under $1, Scottrade charges 0.5% of the total principal on top of its $7 commission. If you bought 1,000 shares of campany Y stock for 80 cents per share, Scottrade is charging you:
Principal = 1,000 * 0.8 = $800
Additional Fee = .005 * 800 = $4
Commission = $7
Total = Additional Fee + Commission = 4 + 7 = $11
Annual, Quarterly or Monthly Fees
Once you open an online brokerage account, some online brokers will periodically charge you a fee for using their service. E*Trade charges a $40 quarterly fee and Charles Schwabb charges a $45 quarterly fee.
Even an online broker that does not charge quarterly or annual fees may still charge inactivity fees if you do not place an order through the online broker annually or monthly. Trading Direct charges a $60 fee for customers who do not place an order each year (January 1st through December 31st). Interactive Brokers charges a $10 fee if you do not place an order each month (however, one you spend enough on commissions, they waive this fee).
Account Transfer Fees
Account transfer fees are fees that a broker may charge you transferring your funds to a new broker. This fee is very easy to overlook (primarily because it is well hidden, often under the "Other Fees" or "Ancillary Fees" section), and is one of the reason why you want to do lots of research before picking an online broker. A few online brokers do not charge any account transfer fees. Some brokers will do a partial transfer of you account for free, but will charge you a fee for a full account transfer. Other brokers will charge you a fee even for a partial transfer and a larger fee for a full transfer. As an example, below are the account transfer fees for Scottrade, TD Ameritrade and Trading Direct.
Scottrade: free for all transfers
TD Ameritrade: free for partial transfers, $75 for full transfer
Trading Direct: $50 for partial transfer, $75 for full transfer
Account Maintenance (or Minimum Balance Requirement)
An account maintenance fee is a fee that an online broker may charge you if your balance falls below a certain threshold. Be aware that an online broker that has no Minimum Starting Balance Requirement could still charge an Account Maintenance fee if your balance falls below a certain level.