Are online brokerage companies safe? How secure and reliable are stock brokers and IRA companies? The safest brokerage accounts in 2023.
Safest Brokerage Firms
| Broker Review | Broker Rating | Stock/ETF Fee | Mutual Fund Fee | Option | Promotion Offer |
|---|---|---|---|---|---|
| Firstrade |  | $0 | $0 | $0 | Earn up to $4,000 cash bonus & get transfer fee reimbursem*nt. |
| Robinhood |  | $0 | na | $0 | Get up to $200 in free stock with a new Robinhood account. |
| TD Ameritrade | | $0 | $49.99 ($0 to sell) | na | $0 stock/ETF trades and a transfer fee refund. |
Safety of Brokerage Firms: An Overview
If you're considering opening a brokerage account, you may have concerns about the security measures at the brokerage firms. This article will address these concerns by examining the protections offered by stock brokerage companies and comparing them to the safeguards available at banks in the United States.
Legitimacy of Brokerage Firms
The vast majority of online brokers are completely legitimate. In fact, some of them are owned by major American banks. For example, Merrill Edge is owned by Bank of America, one of the world's largest financial institutions. Other broker-dealers that are not affiliated with banks have been operating in the brokerage business for several decades. As an example, Fidelity was established in 1946.
Insurance for Brokerage Accounts
The Federal Deposit Insurance Corporation (FDIC) ensures the deposits in American banks, but it does not provide insurance for brokerage accounts. The online investing is considered a separate industry, regulated and protected by different organizations.
The Securities Investor Protection Corporation (SIPC) is a Congress-mandated organization funded by member brokerage firms. It offers insurance coverage for securities such as stocks, bonds, ETFs, options, and mutual funds, up to $500,000 per account. This amount is actually twice the protection typically provided for FDIC-insured bank accounts. Under SIPC policy, up to half of the $500,000 insurance can be used for free cash balances.
It's important to note a key distinction between SIPC and FDIC. While the FDIC protects the amount you deposit, the SIPC safeguards the number of shares in your trading account.
To illustrate this distinction, let's consider an example: Suppose you deposit $500 into a checking account that is FDIC insured. If the bank declares bankruptcy, the FDIC guarantees the $500, and the U.S. government will reimburse you for that amount.
Now, imagine you put the same $500 into a brokerage account and use it to buy five shares of a stock valued at $100 each. If the broker-dealer goes out of business, the SIPC guarantees those five shares, but it does not protect the market price of the stock. If the stock becomes worthless, your account value will be zero, even with SIPC protection.
Consequently, a crucial difference between the banking industry and the investment world emerges: investments can fluctuate in value, while bank deposits have a fixed value. As a result, securities accounts inherently carry more risk than deposit accounts.
The Safest Brokerage Accounts
Robinhood and TD Ameritrade are reputable companies that have never required a bailout and are considered safe options for opening a taxable brokerage or IRA accounts.
Robinhood Promotion
TD Ameritrade Promotion
Safety of Technology
By their very nature, all online brokers offer trading tools to their self-directed customers. These tools range from simple websites to more advanced websites, mobile apps, and even smartwatch platforms. Some brokers also provide desktop platforms with varying degrees of complexity.
Online brokers share the same responsibility as other companies to protect your data. When you submit your information online, it will be transmitted over an encrypted network. You can verify the security and encryption of your connection to the broker's website by checking for a padlock symbol next to the website address (URL).
Brokerage firms take precautions to safeguard your personal information, but they have been targeted by hackers in the past. However, such incidents do not necessarily make online brokerage firms riskier than other financial organizations. Hackers have targeted various computer systems, as exemplified by the recent data breach at Equifax.
Different Securities Carry Different Risks
If you're new to the world of investing and concerned about the safety of your investments, you can start with securities that offer a higher level of protection. For instance, large-cap stocks with a proven track record of dividend payments are generally safer than small-cap stocks with no dividend history. Established blue chip stocks are generally safer than unproven new stocks.
Funds, such as mutual funds and ETFs, tend to be safer than individual stocks because they represent a diversified basket of stocks and bonds. By spreading investments across various assets, funds have less risk of significant decline (but also less potential for substantial growth).
Compared to stocks, bonds are generally considered safer because they have a fixed face value. As a result, bond prices tend to be more stable than equity prices.
However, not all bonds are created equal. Some bonds have high ratings (AAA grade), while others are considered below investment grade, often referred to as "junk bonds" rated below BB+. In general, short-term bonds are safer than long-term bonds.
Instead of investing in individual bonds, you can trade bond funds, which come in various types based on the underlying debt in their portfolio. The safest funds consist of highly-rated, short-term bonds.
All these financial products and more can be bought and sold through online broker-dealers in the United States. The key is to have a good understanding of what you're investing in to ensure the safety.
Managed Accounts
If you're still uncomfortable making investment decisions, you can hire a professional to handle your trades. Many online discount brokers offer this service. The individuals managing brokerage accounts should be licensed investment professionals, but it's always wise to verify their credentials before making a commitment.
Due to the emphasis on low fees, several discount brokers have developed automated software programs that make trading decisions. These "robo-advisory" services can cost as little as 0.00% per year (yes, $0) of your account's value.
Safest Stock Brokers Summary
You can feel confident about opening an investment account and executing your first trade. It's important to choose a broker that is a member of SIPC and FINRA, the industry watchdogs, to ensure the safety of your investments.
Firstrade Promotion
