Before we get started: What exactly is a broker? A broker places your order on the market. If you want to buy Tesla shares, your broker will place a buy order on the stock market for you. Basically, a broker or a brokerage account gives you access to the markets.
In most countries nowadays investors can choose between a vast amount of companies that offer brokerage services. These can be traditional banks like J.P. Morgan or Deutsche Bank, online brokers like Comdirect or TD Ameritrade but also new fintechs like Robinhood or Trade Republic. In this article, we will look at general pros and cons.
The different types of brokers
Traditional banks usually offer the widest spectrum of services. You can have your brokerage account, your credit card, your checking account etc all in one place. They allow you to trade on many different exchanges, often worldwide and in different currencies. Most of them still have physical branches somewhere close to you so you can talk to an advisor face to face. However, usually traditional banks are very costly.
Online brokers usually offer a wide range of services as well. Apart from your brokerage account you can e.g. also get a credit card or open up a checking account. They do not have physical branches, but most have a decent support via phone or mail. Their trading costs usually lie somewhere in the middle between fintech and traditional brokers.
Fintech brokers usually offer very limited services. Most of them only have a brokerage and clearing account - the absolute minimum you need for investing. Many fintech brokers only offer access to one specific stock exchange thereby limiting your flexibility. Furthermore, their support is often not very good. There is a big BUT however: Fintech brokers charge phenomenally low rates sometimes close to zero. The German fintech broker Trade Republic for example offers a flat fee of 1 EUR per trade no matter the volume.
Here are some examples from Germany:
|Account fee||0,10 - 0,14 % of account volume (min. 19,99 EUR p.a.)||Free||Free|
|Cost per trade||1 % of order volume (mind 20 EUR)||4,90 EUR + 0,25 % of order volume (min 9,90 EUR, max 59,90 EUR)||1 EUR|
|Available exchanges||Full range||Large selection||Only Lang & Schwarz|
|Available products||Full range||Large selection||Only selected ETFs, warrants and certificates|
|Available services||Full range||Full range||Brokerage only|
|Other||Physical branches||No branches||Mobile version only, no branches, 25 EUR for AGM attendance, no analytics, average support|
As there are constantly new players entering the market, the lines get more and more blurry. Investors should carefully compare brokers before making their decision as a brokerage account is essential for investing in the stock market. Also: Watch out for hidden costs. Sometimes brokers charge you for things like a dividend distribution or signing you up for an annual general meeting. Therefore, look thoroughly at the pricing document of the brokers you are comparing.