As you get your feet wet, you often hear the terms broker and trading platform. Although these terms are commonly used interchangeably, there are distinct differences between the two.
So, why are the terms often used interchangeably? Because you use both brokers and trading platforms to trade or invest in stocks. In fact, some of the best trading platforms are offered by brokers, further muddying the waters. So, what’s the difference between the two?
What Is a Stock Broker?
A stock broker, also commonly called a broker, broker-dealer or brokerage, is a company that acts as an intermediary between investors and the stock market. Brokers facilitate trades for investors, exchanging cash for shares and vice versa.
Brokers have traditionally charged commissions for these services. Even today, full-service stockbrokers charge between 1% and 2% commissions for their services. However, that doesn’t mean you have to pay commissions to invest. We’ll talk about fees more later in this article.
Thanks to technological innovation over the past few decades, there are several brokers that operate online. Discount online brokers have made investing in stocks online easy and relatively inexpensive.
What Are the Best Online Brokers?
Every broker is its own business, and they all have their own unique fee structures and features. The best stockbroker for me may be different from the best broker for you, depending on the differences in our investing styles, capital capabilities, asset interests, and more.
Although I can’t tell you which broker will be the best for your unique situation, I can tell you that the most popular online brokers in the United States include (in order starting with the most popular by number of customers):
- Fidelity. Fidelity is one of the most trusted financial institutions in the United States. The company has been serving customers for more than seven and a half decades.
- Charles Schwab. Charles Schwab is another traditional full-service broker that evolved with the market to also provide discount online brokerage services. The company has been serving the investing community for nearly five decades.
- Robinhood. Robinhood is strictly an online brokerage that was founded nearly a decade ago. The company caters to millennials and has become a favorite among young active traders.
- Webull. Founded in 2017, Webull is the youngest broker on this list, but don’t let that fool you. The company has quickly grown to become the fourth most popular discount brokerage online by number of customers.
- TD Ameritrade. TD Ameritrade is another brokerage that’s been serving investors for decades. The company has evolved to become a leading online player and is considered a top pick in the active trading community thanks to its thinkorswim platform.
Although the brokers mentioned above are the most popular online options in the United States, there are several other options to choose from. Before signing up for a brokerage’s services, compare your option and consider which option is best for your unique situation.
How to Compare Brokers Online
As mentioned above, each online broker is its own business, with unique qualities that may or may not appeal to you, so it’s important to compare your options before choosing which stockbroker you’ll work with. Consider the following as you compare your options:
- Fees. Many online brokers don’t charge trading commissions, and other fees are minimal. Others may charge commissions and exorbitant fees to manage your account. It’s best to choose a broker that offers the lowest fees for the products and services you plan to access.
- Asset Availability. Some brokers only focus on stocks and exchange-traded funds (ETFs), while others make mutual funds, currencies, bonds, cryptocurrencies, and more available. Consider the types of assets you’re interested in trading and ensure the broker you choose has those assets available to trade.
- Research Tools. Some brokers focus strictly on providing a platform where you can buy and sell stocks. Others offer a wide range of research tools, helping you make educated decisions as you invest and trade. Of course, educated trading decisions typically result in higher profits. Think about the tools each broker offers and how they may help you improve your investing and trading experience.
- Technical Analysis Tools. If you’re a pattern day trader, you rely on technical analysis tools to predict moves in the market and exploit them for quick profits. Even investors use technical analysis to determine the best entry and exit points as they adjust their portfolios. Think about your technical analysis needs and which broker is best at meeting them.
- Promotions. Finally, if you end up with two or three options you think are a good fit, consider promotions. Some brokers, like Robinhood and Webull, offer free shares of stock just to sign up and make your first deposit.
What Is a Trading Platform?
A trading platform is a tool used by investors and traders to buy and sell assets. Online brokers typically offer their own trading platforms, but there is a wide range of third-party trading platforms to take advantage of as well.
Investors and traders alike commonly use third-party platforms for access to tools like technical indicators, trading simulators, and historical data as they make investment decisions.
What Are the Best Trading Platforms?
There are several trading platforms to choose from, each offering its own unique capabilities. So, there’s no one-size-fits-all best trading platform. Some of the most popular trading platforms include:
TD Ameritrade – thinkorswim
Best for Active Traders
Although this is a broker-provided trading platform, it’s one of the most popular in the industry, especially among active traders. That’s because the platform was designed by traders for traders and includes all the bells and whistles even the most active market participants need.
As with most broker-provided platforms, thinkorswim is absolutely free to use, you just pay standard contract fees on derivatives.
Best for Fundamental Research
Bank of America, one of the world’s largest banks, owns Merill Edge. The Merill Edge trading platform is an impressive offering, especially if you like to mix fundamental research into your trading strategy.
The platform offers some of the most robust stock research tools available. These tools are so impressive they make the huge signup bonus and technical tools look like nothing more than icing on the cake.
If you’re a Merill Edge customer, you get free access to the platform.
Best for a Mix of Long-Term Investments & Short-Term Trades
E*Trade is one of the internet’s premier discount online brokers. Like the other options listed here, the company doesn’t charge for domestic stock and ETF trades. Moreover, it offers multiple trading platforms. This gives the company the ability to cater to the active trader as well as the long-term trader who takes a more fundament approach.
How to Compare Trading Platforms Online
There are a few factors you should consider when you decide which platform is best for you. Some of the most important factors include:
- Available Tools. Think about your trading or investment strategy and decide which tools are important for you. For example, if you’re a day trader, you need top-of-the-line technical analysis tools and indicators. On the other hand, if you’re a long-term investor, you take a more fundamental approach to market decision-making.
- Cost. Most broker-provided trading platforms are free to use. If you use a third-party platform, you may have to pay a monthly, annual, or one-time software licensing fee. You may also have to pay data subscription fees regardless of who provides the platform. Make sure you compare all platform-related expenses before you sign up.
- Layout. The market moves on a second-by-second basis. It’s important that your trading platform is structured to make the trading and investing processes as efficient as possible. Some platforms even allow you to structure your own layout so your trading desk shows the exact information you need on the home screen.
Key Differences Between Brokers & Trading Platforms
There are several differences between brokers and trading platforms. The most important to consider are the services and fee structures you’re likely to experience with each. Here’s how these crucial differences compare from one to the next.
Brokers and trading platforms offer two completely different types of services.
Services Provided by Brokers
Brokers are the middle-man between you and the market itself. Brokers earn money by facilitating buy-and-sell trades for their customers. In some cases, the money they earn comes from their customers. In others, it comes from the market makers they use for order fulfillment in a system known as payment for order flow (PFOF).
Services Provided by Trading Platforms
Trading platforms are tools investors and traders use to place trades. These pieces of software offer market data, technical analysis tools, news, and other information that can help you make larger profits in the market.
Although you use a trading platform to place trades, your trades are placed with brokers. Once you place your trade, the broker executes it as requested.
Because brokers and trading platforms are two completely different services, they charge different types of fees.
In the not-so-distant past, brokers typically charged commissions on all trades. Over the past decade or so, commission-free trading has taken the market by storm. Now, most brokers don’t charge commissions for domestic stock and ETF trades. They earn PFOF checks from market makers instead.
There are other fees to consider though:
- Contract Fees. If you trade options or futures, you should pay close attention to contract fees. These are fees brokers charge to execute derivatives contracts.
- Margin Rates. Some traders borrow money from brokers to facilitate trades in margin accounts. As with any other loan, margin trades come with interest rates. If you trade on margins, make sure to look into interest rates when you choose a broker.
- Service/Maintenance Fees. Some brokers charge a monthly, quarterly, or annual service fee if you don’t either maintain a minimum balance in your account or if you miss minimum trade activity requirements. The good news is the most popular players don’t typically charge these fees.
Trading Platform Fees
The vast majority of trading platforms are free to use, especially when your broker provides them. In some cases, you may encounter one of three common third-party trading platform fees:
- Licensing Fee. This is a monthly, quarterly, annual, or one-time fee you pay in order to use the trading platform.
- Data Fees. Some trading platforms give you access to high-level market data in exchange for a monthly or annual subscription fee.
- Indicator Fees. Finally, some trading platforms lock their best technical indicators behind paywalls.
Broker vs. Trading Platform FAQ (Freqently Asked Questions)
I’ve yet to come across a financial topic that isn’t met with questions. Some of the most common questions about the comparison between brokers and trading platforms include the following:
Is a Broker a Trading Platform?
No, a broker is not a trading platform. Investors use trading platforms to place market orders. Those market orders are then routed to your broker who executes the trade on your behalf.
Which Broker Has the Best Trading Platform?
The best trading platform for you depends on your unique needs as an investor or trader. However, TD Ameritrade’s thinkorswim platform is a top-ranked option according to various sources.
Which Trading Platform Is Best for Beginners?
E*Trade is a compelling option for beginners because it offers multiple trading platforms alongside easy-to-use trading tools.
The Bottom Line
The bottom line here is simple; if you’re investing or trading, you’re going to need a broker and a trading platform. The good news is that some of the best trading platforms are free when you choose to work with the broker that developed them.
Now that you know what you need to start trading, it’s time to give it a go. You can also further your trading education with our friends at Trade Ideas.