Online Discount Brokers

Being a member of AAII means you probably take an active role in some or all of your investment decisions. Many members use online discount brokers to buy and sell securities. Increasingly, these brokers have added research tools, analysis and data for customers to supplement their low commissions and to differentiate themselves from competitors. This happens at a time when AAII members are placing more and more importance on these features. According to AAII’s Online Discount Broker Survey, the importance of services has increased among our members from 23% in 2004 to 30% in 2009.

In the past, we have featured a guide to online brokers that simply listed the offerings of over 50 discount brokers. This year, we narrow our focus and take a more in-depth look at the research and analysis tools and offerings of the top five brokers used by AAII members. Our comparison should allow you to better judge the differences between each broker and find the one that fits your needs.

AAII’s Broker Survey

To determine which brokers our members use the most, we turned to AAII’s Online Discount Broker Survey. This ongoing survey polls members on their experience with discount brokers and what they feel is important when selecting a broker. We also tally the most popular brokers used by members. Table 1 lists the five most popular brokers as rated by AAII members in 2009. The table also shows how members have rated these brokers based on overall satisfaction, service reliability, trade price, and execution speed.

To view results and participate in this ongoing survey, visit AAII.com, select “Investor Surveys” from the left navigation bar under “Tools” and click on the Online Discount Broker Survey link.

Comparing the Brokers

The comparison grid here shows details the offerings of the five most popular brokers among AAII members: Charles Schwab, E*Trade, Fidelity Investments, Scottrade, and TD Ameritrade.

The grid highlights the tools of interest to most investors; the following describes what you should expect to see in regard to these services at the Web sites.

Trading Platforms

Online brokerage firms typically offer two types of trading platforms: one for typical investors and one for active traders (usually those who trade on a daily or weekly basis). The trading platforms mainly differ in the interface and the control investors have over each order. For a typical investor, the Web-based interface is all that is needed.

Web-Based

Web-based platforms allow for buying and selling stocks, mutual funds, exchange-traded funds ETFs and sometimes options. All will allow you to place orders for buying and selling using limit and market orders; the row labeled “Additional Order Types” denotes any other types of orders allowed. All also allow customization of order fulfillment such as a day order, good-until-canceled, etc.

The typical Web interface requires you to enter a ticker symbol, number of shares to trade and the order type. All brokers will alert you when the trade has been executed. In addition, you should be able to set up portfolio and individual security alerts for monitoring current holdings and potential purchases. Most brokers allow you to set up price and volume alerts and some will also send e-mail alerts based on news.

Finally, some brokers let you set up trade triggers that allow you to specify conditions for automatic buying and selling. Triggers can include volume, bid/ask spreads, and daily price change to trigger any kind of order (market, limit, stop, etc.).

Active Trading

Most active trading platforms are software-based and run from your computer’s hard drive. All offer streaming real-time quotes, which means you will need a constant connection to the Internet to receive up-to-date price and volume data. Usually, charts are also updated in real-time.

In addition to flexible order types and fulfillment customization, some brokers offer direct access to the market, which allows you to specify the order route as well. Direct access provides a number of advantages to individual investors by cutting out the middle man. You can choose the exchange, make trades more quickly, and have more control over the trade price.

Most active trading platforms also offer tools that can work in real-time like screening and strategy testing. While these tools can be extremely helpful, the features require time to learn and fully understand. Most brokers offer a video demo and written tutorial on how to use their programs.

Research Tools & Data

Online brokers are now offering a wealth of research tools and data to help investors decide which securities to purchase. As a result, many brokers are becoming a one-stop shop for investors. The information and services vary depending on the type of security; here we cover what the sites offer for investigating stocks, mutual funds, and exchange-traded funds.

Researching Stocks

At a minimum, an online broker will offer static real-time quotes that can be manually refreshed. Some offer streaming real-time quotes. Brokers now offer a number of profitability, liquidity and leverage ratios along with annual and quarterly financial statements. Most brokers have five years and five quarters of this data. Varying levels of financial data are offered, some brokers provide more in-depth figures while others summarize statement data. Most will also provide access to SEC filings such as 10-Ks and 10-Qs.

Consensus earnings estimates and analyst ratings are also common on a good brokerage site. Sites that keep estimates over a long period of time are helpful for trend analysis. In addition, most sites also offer free research and analysis reports—some proprietary and others outsourced.

Breaking market and individual security news is also important, especially for more active traders. The number and quality of news sources should be taken into account, but more is not always better. A smaller number of high-quality news sources (such as Dow Jones or Reuters) are better than an overload of mediocre sources.

Technical analysis is important to many investors when it comes to timing transactions. Most brokerage sites offer interactive charts and historical price data. Brokers typically offer the usual technical indicators and the ability to chart these over various timeframes.

Stock screening is an important first step in the stock selection process. Most sites offer a basic stock screening tool, the usefulness of which will vary significantly from site to site—some are fully customizable while others use pre-programmed data ranges and comparison criteria.

Researching Mutual Funds

Mutual fund data, tools and analysis tend to be much less comprehensive at broker sites than that offered for stocks. Ratings (Lipper or Morningstar) are common. Risk data includes beta, alpha, R-squared, standard deviation, mean and correlation. Most sites will compare these values to an index or category average.

Additional fund data can include fees, expenses, manager tenure, portfolio holdings, minimum investments and the overall fund objective.

Mutual fund screening tools are extremely helpful for narrowing the impossibly large universe of funds; however, not all broker sites offer this feature.

Researching ETFs

The presentation of ETF data is typically similar to data on mutual funds; there are usually less statistics and data points on ETFs than stocks. Quotes are usually offered in real-time. Another issue is the lack of historical data due to the newness of many ETFs. Nevertheless, brokerage firms may offer real-time or streaming real-time price and volume quotes, charting tools, screening tools and general ETF data such as holdings, performance, risk and ratings.

Portfolio Tracking

Portfolio tracking tools at broker sites can only be used for the accounts you hold with that broker. Unlike comprehensive portfolio management software programs, brokers will track only the value of current holdings. While you can view a history of your transactions, you must use another program to calculate overall portfolio performance. If you hold accounts with multiple brokers, you will need a separate program to combine your entire portfolio in one place. For those using trading software, most brokers allow you to download recent transaction data directly into portfolio software programs.

Most brokers limit streaming, real-time portfolio quotes and balances to their active trading platforms. With Web-based trading, you most often receive a real-time, but static, portfolio quote that must be manually refreshed.

In addition to viewing current values of holdings, brokerage customers can set up watchlists, which can be a useful tool for monitoring potential investments. Creating watchlists on a broker site allows for an easy transition from watching to owning—should the opportunity arise.

While portfolio tracking is limited, most brokers will offer some level of diversification and asset allocation analysis tools. These tools can be extremely helpful, but bear in mind that only your holdings with that broker are analyzed. For comprehensive portfolio trading and analysis tools, you will need to use a third-party program.

Other Tools

Most brokers offer investment calculators, guides and educational materials. This year, many brokers have added a Roth IRA conversion calculator since tax changes may make it profitable for some investors to covert a traditional IRA to a Roth IRA in 2010.

Mobile trading has become a great way for investors to trade while away from their computers. All of the brokers in this comparison offer some type of mobile trading and research tool. Most brokers offer a version of their Web sites that is formatted to fit the smaller screen of a smartphone or other mobile device. These interfaces include the ability to make basic trades, research a security’s current price and volume statistics and read breaking news.

Top Five Brokers

Charles Schwab

• Comparison Grid
  

Entering orders with Charles Schwab is simple using the Web-based interface. However, there is a lack of price and volume data provided when making a trade. Other brokers provide a current quote once a ticker has been entered. Schwab provides price data only during the order review process.

Price, volume and news alerts can be set up and trigger orders can be placed only through the active trading platform, StreetSmart Pro. A handy feature is the ability to enter up to three orders on the same order ticket page.

Schwab’s StreetSmart Pro is free, but available only to active traders (48 or more commissionable trades in the past year). The active trading platform trades stocks and options and includes fundamental and technical stock screening in real-time. Schwab’s Strategy Tester allows you to develop and test technical trading strategies.

Stock data on the Schwab Web site includes ratios, financial statement data, earnings data from Reuters, technical charting tools, industry data, and historical prices going back to 1998 (when available). Proprietary research reports from Schwab analysts and a Schwab Equity Rating round out the site’s offerings.

The stock screening tool has over 75 fields for screening and close to 7,000 stocks in the universe. Unique to the site is the ability to screen based on technical indicators. The screener provides ranges for criteria, showing the number of stocks passing each individual criterion. The stock screener is one of the smoothest and easiest to use of its kind when it comes to adjusting and changing criteria.

Mutual fund data is provided by Morningstar and includes risk statistics and Morningstar ratings. The mutual fund screener has over 25 data fields for screening. However, the screener is fairly inflexible, and mutual fund screens cannot be saved.

ETF data is somewhat lacking, but analysis and commentary is abundant. Performance data does not include calendar-year returns, and there are no risk statistics. An analysis of ETF holdings and asset breakdowns is helpful. A proprietary Schwab Report Card for ETFs provides some useful commentary on an ETF’s performance, risk and more. A section called Opinions/Analysis includes an in-depth analysis of the ETF from Market Edge.

The ETF screener mimics the easy-to-use stock screening tool, with over 50 ETF data points for screening and over 900 ETFs in the database. Screens can be saved for later use.

The portfolio tools allow you to track the diversification of your holdings based on asset type and sector. You can set up a target allocation and Schwab will notify you when your portfolio is “out of balance” based on current holdings. The Schwab Quarterly Portfolio Profile is a great way to see how your portfolio stacks up against your targets and benchmarks. It also points out sections of your portfolio that are over-concentrated.

You can create watchlists at Schwab’s site, but they are not as seamlessly integrated into the trading and portfolio tools as at other sites.

E*Trade

• Comparison Grid

E*Trade’s Web-based trading platform displays real-time bid and ask quotes, making order entry simple. Alerts on individual securities consist of price movements, news, earnings data, stock splits and analyst ratings changes.

E*Trade offers Power E*Trade Pro for free to all investors. This active trading platform lets you trade stocks, ETFs and options and provides direct access to the markets. Users can choose the order path or use a default route. Power E*Trade Pro also includes a Strategy Scanner, which lets you develop and backtest technical trading strategies.

The Quotes & Research area of the E*Trade Web site includes data on individual securities such as ratios; financial statement data; research reports from Reuters, Standard & Poor’s and Credit Suisse; and industry data for comparison. In addition, E*Trade provides historical earnings data and insider trading activity.

The charting tool allows you to plot numerous technical indicators and company events. Timeframes are customizable, and you can compare stocks against industry peers and indexes. Downloadable historical price data goes back only one year.

The stock screening tool is found under Trading Ideas. The screener has a universe of 8,900 stocks and 42 criteria for screening, including price and volume data, fundamentals, earnings and dividends, and technical indicators. You cannot input custom values for most of the criteria, but you can see how many stocks meet individual criteria, which is helpful. Screens can be saved for later use.

Mutual fund data is from Morningstar and includes risk and ratings. Calendar-year returns go back 10 years. There is no mutual fund screening tool. Price and volume charts include technical indicators.

Data on ETFs includes up to 10 years of performance data (where available), Morningstar risk and performance ratings, risk statistics and holdings. Charts include technical indicators and the ability to customize date ranges and to compare to indexes and other securities. There is no screening tool for ETFs.

In addition to viewing the value of current holdings, you can export your portfolio data to Excel. E*Trade has a free tool called MarketCaster that allows you to view streaming quotes on your portfolio.

E*Trade also offers a Portfolio Analyzer that displays diversification by asset class, sector, stock type and style, and geographic location, and also reveals stock intersection. The stock intersection tool shows which stocks are held by multiple mutual funds. The portfolio analysis tool is provided by Morningstar and almost identical to its Premium X-Ray tool. As you research securities, you can push the “Add to Watchlist” button. Once a security is added to the watchlist, you can set up price alerts.

Fidelity Investments

• Comparison Grid

Fidelity’s Web-based trading platform is standard and offers real-time quotes for securities you are trading, with a manual refresh. You can set up price and news alerts. You can also receive alerts for your portfolio overall, general market news and commentary, and more.

Fidelity’s Active Trader Pro platform is free for traders with more than 36 trades made in a rolling 12-month period. A unique feature is the ability to trade mutual funds via the active platform. You can also place multiple orders at one time and use conditional orders (a type of order that will be executed or cancelled if a certain criterion is met). Another interesting feature is the ability to search Fidelity’s database of news stories.

The Fidelity Web site’s stock data is impressive and offers a dividend history going back eight quarters. Earnings data is from StarMine and includes an easy-to-read chart showing the reported earnings with analyst estimates for the last eight quarters and estimates for the upcoming quarter.

The charting tool is also very easy to use and includes a list of events (e.g., price crosses moving average and MACD) that can be automatically plotted. The stock screening tool has over 100 data fields for screening, including technical analysis criteria. You can see how many stocks meet each criteria; however, the screener will only display up to 500 stocks. Also, you must choose from data ranges or percentiles when screening.

Mutual fund data is not as impressive as the data on stocks; however, basic fund data is provided. Risk statistics are somewhat lacking and there is no calendar-year performance data.

Fidelity’s Fund Evaluator is a bit different as it requires you to narrow the field using a combination of only five data points before you can implement a more complex screen with 12 criteria to choose from. The screen results highlight Fidelity-sponsored funds first then list any other funds meeting your criteria.

The ETF data is also somewhat lacking, with minimal risk data and no ratings. Basic ETF information about performance, fees and holdings is provided. The ETF screener has about 20 criteria for screening but, again, uses data ranges.

Portfolio tools include a number of alerts for your overall portfolio, including account balance and trading activity, portfolio allocation and more. You can also see your current allocation.

Another interesting feature is the Hypothetical trade tool, which allows you to see how any security will affect your portfolio’s diversification and risk levels.

Scottrade

• Comparison Grid

Scottrade has been one of the most popular brokers among AAII members for years and has recently redesigned its site. Its popularity is not surprising, since Scottrade is known for low commissions, and the site is easy to navigate and use. That being said, the site does lack some of the bells and whistles of other popular brokers.

Placing trades is simple, but Scottrade does not provide any price or volume information on the order placement page. After you have entered the order, you can review it and view current price and volume data. You can set up price, volume, news and technical analysis alerts.

ScottradeELITE is Scottrade’s active trading platform; it is free for all customers with an account value of over $25,000. You can trade stocks, ETFs and options, but you cannot control the order routing. ScottradeELITE also allows you to set up price and new alerts for stocks. However, you cannot import your Scottrade holdings to the ELITE tool to create alerts; you must enter holdings manually.

The layout of stock data on Scottrade’s Web site is interesting in that you can hover your mouse over a data point and read a definition of the criterion and see the data points for major competitors. Charts of insider trading activity are somewhat unique to Scottrade as well. Earnings data includes seven quarters of historical data and two quarters of consensus estimates. Hovering the mouse over the earnings bar chart provides the actual earnings and the high, low and consensus estimates. The site also provides stock reports from S&P and Reuters.

The stock screening tool has over 30 criteria for screening and includes S&P Star Ratings. This screener allows for user-defined price and dividend comparison values, but other comparison values are preset ranges. Screens can be saved for later use.

Scottrade offers a Java-based tool called Scottrader with streaming real-time quotes. You must set up your portfolio holdings within the tool or search for stocks individually.

Mutual fund data is provided by Lipper and includes Lipper Leader ratings. The site is lacking in risk statistics on the quotes page as well as calendar-year return data. A useful feature is a tool that shows similar funds (based on fees, Lipper ratings and fund category). As you are researching, you can choose to view a list of funds that are in the same category, have similar Lipper ratings and more.

The fund screening tool has over 20 criteria for screening and includes Lipper Leader ratings and risk statistics. You can view the risk statistics after screening under the Fundamental tab.

ETF data is somewhat lacking but includes Lipper Leader Ratings as well as a charting tool. The screening tool includes 18 data fields for screening, along with Lipper ratings and risk measures. Again, the risk data is missing from the ETF summary pages, but can be viewed after screening the universe of ETFs.

Scottrade does not offer any portfolio tools to analyze diversification and allocations. You can view your current holdings and their current values. You can also create watchlists.

TD Ameritrade

• Comparison Grid

TD Ameritrade has undergone some changes over the last few years, acquiring a number of companies such as thinkorswim, an online broker targeting active traders.

Placing orders using the Web-based platform is straightforward. Unique to TD Ameritrade is the ability to customize the order routing through the exchange. (Most brokers only allow for order customization through their active trading platforms.) The advantage, however, is limited. Unlike with the active platform, you do not have bid/ask and volume data for each exchange when using the Web site to route orders.

Another helpful feature is the ability to set up trade triggers. This means you can specify conditions for automatic trading (for example, a limit order at $20 that triggers when a stock reaches a specific level of trading volume). You can set up triggers based on volume, bid/ask spreads, and daily price change. You can also specify price, volume and news alerts.

TD Ameritrade’s active platform is called Command Center and is free for all customers. Using this platform you can trade stocks and options, view current price and volume statistics on multiple exchanges, and create charts using streaming data. TD Ameritrade is working on integrating thinkorswim’s active trading platform, which is geared toward day traders and those interested in creating various types of options spreads.

Stock data offered at the Web site includes ratios, five years and four quarters of financial statement data, SEC filings, earnings data and estimates, analyst reports and ratings from a number of firms, technical charts, and historical prices going back to 1989.

The stock screening tool has over 45 criteria for screening and over 11,000 stocks in the database. The screener only allows for predefined ranges to be used as comparison values. You can see how many stocks meet each individual criterion and create custom views.

Mutual fund data is provided by Morningstar and includes ratings and risk statistics, 10 years of annualized performance, four calendar years of performance, and a list of fund holdings. TD Ameritrade’s fund screener has over 35 criteria for screening and over 20,000 funds in the database, but TD Ameritrade only trades about 10,000 of those funds. Similar to the stock screener, you can use only pre-defined ranges for comparison.

ETF data includes risk statistics, basic performance data and a technical charting tool. The ETF screener has over 40 criteria for screening and about 900 ETFs in the database. It works just like the stock and mutual fund screeners.

Portfolio analysis tools are limited to diversification by asset type. You can view your current holdings and performance. For tax purposes, you can view both realized and unrealized gains and losses going back to 2002.

An interesting tool offered to all TD Ameritrade customers is StrategyDesk, which is a trading and analysis platform that combines backtesting, charting and real-time screening for developing, testing, and executing custom trading strategies.

Conclusion

Choosing an online broker requires consideration of costs as well as services provided. Some brokers offer a wealth of data and useful research and analysis tools, while others offer only a minimum of both. It is up to you to determine your needs and balance those needs with the costs of these services.