Actually, there is only one best broker. It’s Interactive Brokers (IB). Please don’t fall for any of these commission-free brokers like Robinhood or these fancy new models like Motif. Just go with IB. Here’s why:
Robinhood Versus IB:
Robinhood is ideal if you make a few purchases and don’t do anything even slightly out of the ordinary. But why limit yourself? Here are the key ways that IB beats Robinhood:
- Margin Rates. IB’s margin rates are the lowest in the industry. They are even lower than most “Qualified Mortgages”. Here are the latest rates. Contrast this with Robinhood, which charges a complicated monthly fee tiered structure. The key disadvantage of the monthly fee structure is that you pay even when you aren’t using margin. But it’s worse than that. Take the example of someone who has a $5,000 margin loan. At IB, they’d pay 3.41%, or $14.21 per month, in margin interest. At Robinhood, they’d pay around $25 per month (slight variations depending on their account size), or 6%. The numbers are clearly much lower in IB’s case.
- Options Trading. While Robinhood is slowly rolling out options trading, it only offers up to Level 3 options. That means that on Robinhood you can’t sell naked calls or puts. That is a key disadvantage.
- Portfolio Margin. IB (and most other discount brokers) offer what is called “portfolio margin”, which calculates a maintenance requirement based on all of your positions taken as a whole. If you have several stocks, you’ll get a lower maintenance requirement because having multiple stocks reduces (in theory) portfolio volatility. Robinhood does not offer this. The punchline here is that you are much more likely to get a maintenance call in Robinhood even if you have more than enough account value.
- Overseas Exchanges. With IB, you have access to the widest range of overseas exchanges of any discount broker. Want to invest in self-storage facilities in France? Check. Want to buy an ownership position in the Auckland airport? Check. This is a huge benefit. And no other discount broker comes close to IB in terms of access to international exchanges.
Those are what I consider the key benefits of IB over some of the new “free trades” brokers like Robinhood. Something like Motif is an even worse deal because the only way you get a free trade is if you use a market order at the next day’s open. That just means that your trades are going to execute at the “ask” price first thing in the morning when spreads are largest between the “bid” and the “ask”. So you pay for the privilege of “free” by paying a worse purchase price.
As between IB and the other discount brokers, it’s really no contest. IB is either slightly or dramatically better in all areas. And as a bonus, IB has retro looking trading software that makes you feel like you’re on a Bloomberg terminal instead of a slick new SAAS application. My only complaint about IB is that they take about four business days for deposits to clear versus only one or two days at Ameritrade.
If you’d like to join IB, and support this blog in the process, please use this link. If you join just let me know and I’ll send you ½ of the $200 referral bonus via paypal after it’s been paid! Note that payout of the referral fee from IB requires that you keep a $10,000 balance in the account for a year.