The best online stock broker is an ECN

The online stock brokers are usually characterized as ECN or bucket shops. In short, an ECN broker isn’t interested if you are losing or making money day trading stocks or forex, whereas in a bucket shop you are actually trading against the broker. If you lose money, they win and vice versa. You obviously see that if you make money trading using a non ECN broker, you probably will encounter several kinds of problems. That is why my investment advice is towards an ECN online stock broker. Online investing is a risky business, don’t add more risk.

Before I continue, we’d better take a look at the definition of an ECN broker, according to Investopedia:

An electronic communication network (ECN) is an electronic system that attempts to facilitate (for market makers) or eliminate (for individual investors) third party orders entered by a client’s brokerage to be executed in whole or in part. ECNs network major brokerages and traders so that they can trade between themselves without having to go through a middleman. The advantage of an ECN is that it displays orders in real time, whereas on the NYSE, most investors are limited to only viewing the best bid and ask prices.

Now that you know what ECN stands for, I’ll share my experience with you about when I was trying to find out how to pick the best online stock broker. I have spent tens of hours reading forum posts, blogs and websites before I end up with my recommended online brokers found below.

2 or 3 years ago I opened an online forex account at Oanda. Oanda is a very well known forex broker even to this day and is regarded one of the top forex brokers if not the best. Due to the publicity and good words I had been reading online, I decided to give it a go with Oanda. I wasn’t going to trade forex professionally or any kind, I just wanted to experiment, as forex trading was something entirely new to me back then. I went on and opened a demo trading account and began watching the forex charts.

Oanda Forex Trading Platform

The good thing about Oanda is that a demo trading account never expires. You can trade forex with paper money forever. You get real time forex prices and real time forex graphs. It’s a dream come true. Up to this point, I recommend Oanda as your online forex broker if you are just starting out, given you will paper trade in the beginning. It offers pretty much everything a new forex trader will need to get a feeling of the whole forex thing. Test your strategies, trade with any size of trading lot, lose and make money risk free.

Now that you got a grip of forex trading (and probably lost quite a few times your demo trading capital), it’s time to get our business to an ECN broker. The reason is that I have read in various forum posts that in the end Oanda is a bucket shop. You are actually trading against the forex broker. And I don’t want that and you shouldn’t either. If you google about bucket shops, you will most probably come across stories of forex traders not able to withdraw their money after succeeding in forex trading. What is the point of actually making money by trading, if you are not going to be allowed to get it home? Frankly and I must emphasize this, I haven’t heard of something like that about Oanda. But on the other hand there are numerous stories about bucket shops who won’t pay their customers money if they have won money. And that rings a bell, since I come from a betting world, where bookmakers don’t pay their winning clients, forfeit their money and close their accounts. There are bettors who have waited for months until they could withdraw their money, if ever! A bucket shop does remind me of a bookmaker, whose business is to make money for themselves, not their clients. It’s like a casino. A business that was made to make money for their owners, they didn’t invest in a institution giving away their money! A very easy way to distinguish whether an online broker is a bucket shop is to check out their deposit methods. If they allow deposits via credit cards, it’s a sign they want your money fast. What’s more, if they also offer a sign-in bonus, think twice why they might actually do that.

My most recommended ECN online brokers are Interactive Brokers (their trading platform shown above), Dukascopy and MB Trading. Personally I am trading via Interactive Brokers (IB in short) but the other two brokerages are in my top list. I have heard only good remarks about any of those 3. There are more ECN brokers to choose from, but my investment advice is to go with popular brokers. If your broker faces problems, you shouldn’t be their only customer.

Moving on, I will talk about trading software and commission among online brokers in the next article.