4

There are sites such as OptionsHouse and TradeKing which offer trades for as low as $4. This is less than half of what's offered from the big brands.

Are there any catches or things I should know about before using such sites? Are their brokers equally effective?

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    There should be a catch i.e. for a limited period only, only if you do 100 trades in a fortnight or something. It should be in the terms and conditions. Have a go through it. You will be surprised what all you can come across in the fine print. Are their brokers equally effective - why shouldn't they be ? They also want your business. – DumbCoder Aug 1 '13 at 12:39
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    With zero human intervention, the $4 doesn't surprise me. But DC is correct of course, read the fine print. – JTP - Apologise to Monica♦ Aug 1 '13 at 17:01
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Generally, yes.

Rather than ask, "why are these guys so cheap?", you should be asking why the big names are so expensive. :) Marketing spend plays a big role there. Getting babies to shill for your company during the super bowl requires a heck of a lot of commissions.

Due to the difficulties involved in setting up a brokerage, it's unlikely that you'll see a scam. A brokerage might go bankrupt for random reasons, but that's what investor insurance is for. "Safeness" is mostly the likelihood that you'll be able to get access to your funds on deposit with the broker. Investment funds are insured by SIPC for up to $500,000, with a lower limit on cash. The specific limits vary by broker, with some offering greater protection paid for on their own dime. Check with the broker -- it's usually on their web pages under "Security". Funds in "cash" might be swept into an interest-earning investment vehicle for which insurance is different, and that depends on the broker, too.

A few Forex brokers went bankrupt last year, although that's a new market with fewer regulatory protections for traders. I heard that one bankruptcy in the space resulted in a 7% loss for traders with accounts there, and that there was a Ponzi-ish scam company as well. Luckily, the more stringent regulation of stock brokerages makes that space much safer for investors.

If you want to assess the reliability of an online broker, I suggest the following:

  • Are they a Forex broker? Definitely give these guys closer scrutiny.
  • Check their registration, at SIPC, NFA, or FINRA.
  • Look for ratings from trusted publications such as Barrons, which gives these two 4+ stars
  • Check out what other investors are saying, such as at a site like brokerage-review.com.

It's tempting to look at when the brokerage was founded. Fly-by-night scams, by definition, won't be around very long -- and usually that means under a few months. Any company with a significant online interface will have to have been around long enough to develop that client interface, their backend databases, and the interface with the markets and their clearing house. The two brokerages you mentioned have been around for 7+ years, so that lends strength to the supposition of a strong business model. That said, there could well be a new company that offers services or prices that fit your investment need, and in that case definitely look into their registrations and third-party reviews.

Finally, note that the smaller, independent brokerages will probably have stiffer margin rules. If you're playing a complex, novel, and/or high-risk strategy that can't handle the volatility of a market crash, even a short excursion such as the 2010 flash crash, stiff margin rules might have consequences that a novice investor would rather pretend didn't exist.

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  • OptionsHouse is SIPC insured. – TheOne Aug 4 '13 at 17:03
  • Yep, nearly every brokerage that you see will be SIPC insured. If you find one with good rates or a great intro offer that isn't insured, that'll be a big red flag. BTW tons of people in the trading world know about these discount brokerages; almost all of the traders I know or read about stay away from the big names due to their high commissions. – AndrewS Aug 5 '13 at 15:17
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I have used TradeKing for a couple of years now and love it. It really is a great site. They hold an IRA trading account for me and have been helpful in rolling money into that account, and with answering the occasional question.

Previously I have used Scottrade and found that TradeKing is a much better value.

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    I used TradeKing for several years and for the most part it was indistinguishable from Fidelity. However getting your tax forms could sometimes be an adventure. They were repeatedly much later than promised. – Craig W Aug 1 '13 at 20:51

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