An online broker is a platform that allows individuals to buy and sell securities — stocks, ETFs, bonds, options, futures — through an electronic interface without the need for a human broker to execute each trade. The rise of online brokers starting in the 1990s democratized investing by slashing commissions from $50–$150 per trade to near-zero. Today, nearly all major online brokers offer commission-free trading for US stocks and ETFs. This guide explains how online brokers work, their business models, and how to choose one.
How Online Brokers Execute Trades
When you place a trade on an online broker, the order goes through a routing system that determines where and how it executes. For small retail orders, most brokers use payment for order flow (PFOF) — routing orders to market makers like Citadel Securities or Virtu Financial, who pay for the privilege. The market maker provides price improvement (executing slightly better than the public quote) while keeping the spread. For larger orders, smart order routers split trades across exchanges and dark pools to minimize market impact. The entire process typically completes in milliseconds for market orders in liquid securities.
Account Types Available
Online brokers offer a range of account types. Taxable brokerage accounts hold any security type with no contribution limits or tax advantages, but full flexibility. Individual Retirement Accounts (Traditional IRA, Roth IRA, SEP-IRA, Solo 401k) provide tax advantages for retirement savings. 529 educational savings accounts fund education expenses tax-advantaged. Custodial accounts (UGMA/UTMA) hold securities for minors. Margin accounts allow borrowing against the portfolio. Health Savings Accounts (HSA) are offered by some brokers and provide triple tax advantages for medical expenses. Not all brokers offer all account types — verify availability before opening.
How Online Brokers Make Money
Despite zero-commission trading, online brokers generate substantial revenue. PFOF is the primary model for most retail-focused brokers. Interest on margin loans — brokers charge 2–12% on margin balances. Interest on cash balances — uninvested cash in brokerage accounts often earns minimal interest while the broker sweeps it to partner banks earning the full Fed Funds rate. Securities lending — brokers lend short-sellers the shares they sell short, collecting a lending fee; customers whose shares are lent out may or may not receive a share of this income. Premium subscription tiers (Robinhood Gold, Fidelity research subscriptions) generate direct fees.
Key Takeaways
- Online brokers execute trades electronically; most offer commission-free US stock and ETF trading.
- PFOF routes orders to market makers who pay for retail order flow.
- Cash sweeps, margin interest, and securities lending are major revenue sources despite zero commissions.
- Fidelity and Schwab avoid PFOF and use direct routing — important for price execution quality.
- All major US online brokers are FINRA-regulated and SIPC-insured up to $500,000.
Top Platforms
| Platform | Category | Key Feature | |
|---|---|---|---|
| Fidelity | Full-Service | No PFOF; best-in-class research; zero-expense index funds | View |
| Charles Schwab | Full-Service | Comprehensive tools; fractional shares; StreetSmart Edge platform | View |
| Interactive Brokers | Advanced | Lowest margin rates; global market access; advanced order types | View |
| Robinhood | Beginner | Simple mobile interface; fractional shares; crypto trading | View |
| tastytrade | Options Focused | Low-cost options trading; educational content for derivatives | View |
How to Choose a Platform
- For long-term passive investing: Fidelity or Schwab — best research, no PFOF, zero-expense funds.
- For active options trading: tastytrade or Interactive Brokers — lower per-contract costs.
- For beginners: Fidelity or Robinhood — straightforward interface and fractional shares.
- For global market access and lowest margin rates: Interactive Brokers.
- Verify SIPC insurance and check the broker's cash sweep rate — some pay well below the Fed Funds rate.
Frequently Asked Questions
What is SIPC insurance?
SIPC (Securities Investor Protection Corporation) insures brokerage accounts up to $500,000 ($250,000 for cash claims) in the event of broker failure. It covers the failure of the brokerage firm — not investment losses from market movements. SIPC membership is required for all registered broker-dealers. Many brokers also carry supplemental insurance coverage above SIPC limits through private insurers.
What is a Pattern Day Trader?
A Pattern Day Trader (PDT) is defined by FINRA as anyone who executes four or more day trades (buying and selling the same security within the same trading day) within a 5-business-day rolling period in a margin account with less than $25,000. PDT accounts must maintain $25,000 in equity. If your account falls below this threshold, you are restricted to 3 day trades per 5-day period until the balance is restored.
Can you lose more money than you invest in a brokerage account?
In a standard cash account trading long positions only, you cannot lose more than you invest — stocks can go to zero but not below. In a margin account, you can lose more than your initial deposit if leveraged positions move against you significantly. Short selling also carries theoretically unlimited loss potential since a stock's price has no ceiling. Certain options strategies (naked calls, short puts) can also result in losses exceeding the initial capital.
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