Key Takeaways

Comparative advantage—an economy’s inherent ability to produce a product or service at a lower opportunity cost than its trading partners—is an economic principle demonstrating the benefits of specialized production.

Its focus on opportunity costs contrasts with absolute advantage, which occurs when a producer can provide a good or service in greater quantity for the same cost, or the same quantity at a lower cost, than its competitors.

Comparative advantage suggests that countries will engage in trade with one another, exporting the goods in which they have a relative advantage. It is also the catalyst for free-trade policies, which reduce or eliminate barriers to trade across international borders.

Economist David Ricardo popularized comparative advantage theory, which argues that free trade works even if one partner in a deal holds an absolute advantage in all areas of production. As such, one partner makes products cheaper, better, and faster than its trading partner.1

Comparative advantage theory supports free trade by advocating specialization according to comparative advantage, benefiting all involved nations.

Origins and Fundamentals of Comparative Advantage

Comparative advantage is an economic law, dating back to the early 1800s, that demonstrates the ways in which protectionism (or mercantilism as it was called at the time) is unnecessary in free trade. The primary fear for nations entering free trade is that they will be outproduced by a country with an absolute advantage in several areas, which would lead to imports but no exports. Comparative advantage stipulates that countries should specialize in a certain class of products for export, but import the rest—even if the country holds an absolute advantage in all products, or uncontested superiority to produce goods better.1

The essence of this law can be illustrated with a simple example. Imagine that you are a skilled cabinetmaker as well as a gifted painter. It takes you a day to build a cabinet or a day to paint a picture. In the local economy, paintings sell for $400 and cabinets go for $350. Your neighbor also shares the same skill sets, but it takes him a day and a half to build a cabinet and three days to complete a painting. You have an absolute advantage over your neighbor in both areas, so you should try to outproduce him across the board, right? Wrong.

Here’s why: If you flip between painting and cabinetmaking over a six-day workweek, you would produce three paintings and three cabinets worth $2,250. If your neighbor embarked upon the same work schedule, he would produce one painting and two cabinets worth $1,100. There would be a total of four paintings and five cabinets produced: a total of nine production units. If, however, you were to choose to focus on painting, the area where you have the greatest comparative advantage and the most profit, and leave cabinetmaking to your neighbor, something magical would happen. You would produce six paintings worth $2,400 per week, while your neighbor would produce four cabinets worth $1,400, bringing the total to 10 production units. In real terms, both you and your neighbor would be richer for specializing—and the local economy is one production unit the better for it.

How Comparative Advantage Supports Free Trade

Economists have been uncommonly uniform in advocating free-trade policies for centuries, and comparative advantage is the reason why. The theory suggests that total economic welfare in all countries is improved when countries focus on those industries where they have the highest expertise and success, and the lowest opportunity costs.2

To explain opportunity cost, we’ll answer this question: Why don’t NBA players mow their own lawns? Ostensibly, NBA players are stronger and faster than their landscapers and could do it more effectively. However, NBA players can maximize their value and productivity by focusing on basketball rather than wasting energy with a lawn mower; the opportunity cost is too high. Instead, the basketball player and landscaper each specialize and trade, using money as an intermediary representation of their respective productivity.

Comparative advantage says that countries should behave similarly. Laborers in the United States have relatively high levels of education and relatively advanced capital goods; this makes them very productive. However, this doesn’t necessarily mean that American workers should produce everything that American consumers need. Instead, maximum efficiency and output can be achieved by specializing in those areas with the lowest opportunity costs and trading with other countries.

Understanding Free-Trade Policies

Free-trade policies, in their truest form, advocate for a complete absence of import restrictions (such as tariffs and quotas) and for no subsidization of export industries. Proponents of free trade argue that restrictions on trade make all consumers, even Americans, poorer than they otherwise would have been.

The crux of the argument centers on the benefits of comparative advantage. When the laborers of one country specialize where they have the lowest opportunity costs, those industries achieve economies of scale and innovate. The increase in production causes prices to decline. American consumers see their real costs of living decline when cheap foreign goods are combined with cheaper domestic goods. Standards of living improve as a result.

Abbreviated as this explanation is, it highlights the academic arguments in favor of open international markets. During the 19th century Industrial Revolution, for example, Britain provided support for comparative advantage by essentially outsourcing its food growth (importing grains, meat, cheese, wine, etc.) and focusing on manufacturing goods for export, thus becoming the workshop of the world for decades.34 And in today’s increasingly international economy, the theory is even more relevant.

Barriers to Complete Free Trade

If economists—who rarely agree—are almost uniformly in favor of free trade, why doesn’t the world have open trading between countries? There are many reasons, but the most influential is something that economists call rent seeking. Rent seeking occurs when one group organizes and lobbies the government to protect its interests.5

Say, for example, that producers of American shoes understand and agree with the free-trade argument—but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes. Even if laborers would be most productive by switching from making shoes to making computers, nobody in the shoe industry wants to lose their job or see profits decrease in the short run. This desire leads the shoemakers to lobby for, say, special tax breaks for their products and/or extra duties (or even outright bans) on foreign footwear. Appeals to save American jobs and preserve a time-honored American craft abound—even though, in the long run, American laborers would be made relatively less productive and American consumers relatively poorer by such protectionist tactics.

The Bottom Line

Comparative advantage urges nations to engage in free trade and specialize in their most advantageous areas—instead of looking to bolster weak industries from foreign competition by imposing protective tariffs that otherwise stifle the production that leads to overall gains in wealth. Subsidizing domestic industries or imposing import tariffs diminishes the benefits of comparative advantage by creating market distortions. Subsidies and import tariffs can hinder comparative advantage by leading to inefficiencies.

Interactive Brokers (IBKR) and E*TRADE are full-service online brokers that have been around for decades. Interactive Brokers is primarily geared toward satisfying the needs of sophisticated investors with its powerful Trader Workstation (TWS) platform. The company offers brokerage services that focus on broad market access, low costs, and outstanding trade execution. IBKR also offers IBKR Lite, a commission-free version of its trading platform, to open up access to more novice investors. And, even in this higher interest rate environment, IBKR continues to stand out with some of the lowest margin rates in the business.

E*TRADE is a well-known broker that provides investors with a broad spectrum of tools that assist with all types of trading. Investors of all skill levels can appreciate the streamlined, intuitive platform, which allows for active trading or passive investing and offers several pre-built portfolios and automated portfolio building tools.

Although IBKR and E*TRADE have a lot in common, there are some major differences. Most notably, IBKR offers investors the ability to trade cryptocurrencies and access many international markets, while E*TRADE does not. On the flip side, E*TRADE offers more educational content and savings accounts, while IBKR does not. We'll take a deeper look to compare these two brokers to help you decide which may be a better fit for your trading and investing needs.

Open an Account

• Account Minimum: $0.00
• Fees: $0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume with IBKR Pro. $0.65 per contract for options on TWS Lite; that is also the base rate for IBKR Pro users, with scaled rates based on volume.

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Open an Account

• Account Minimum: $0
• Fees: No commission for stock, ETF, and mutual fund trades; options are $0.50-$0.65 per contract, depending on trading volume

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Usability

Interactive Brokers offers investors IBKR Lite, for the more novice investor, and IBKR Pro, for the more sophisticated, active trader. IBKR’s pro platform features Interactive Brokers SmartRouting, which helps support ideal order execution by searching for the best available prices for stocks, options and combinations across exchanges and dark pools.1 This trading technology is coupled with the ability to invest globally across 150 markets in 33 countries in stocks, ETFs, options, futures, currencies, bonds, mutual funds, and cryptocurrency through an impressive all-in-one platform, 24 hours a day and six days a week.

Interactive Brokers’ vast offering is accessible via desktop—Trader Workstation (TWS)—or mobile app, and you can fund your account in 26 currencies and trade assets denominated in multiple currencies.2 IBKR also has Client Portal, a web-based platform, and IBKR GlobalTrader, both of which are simplified experiences compared to the robust TWS and IBKR mobile app. IBKR offers real-time streaming data, charting, tools, research, and news on all platforms. Simply put, IBKR offers a very powerful and customizable trading platform—a fact that is reflected in the trading categories it continues to dominate in our reviews. 

E*TRADE has been a leading name in the retail brokerage industry since 1982. With this history comes a deep knowledge of what investors need and want. This experience serving retail investors is one of the reasons E*TRADE won Investopedia’s Best Broker for Ease of Use category. E*TRADE also offers a web platform, downloadable Power E*TRADE, and mobile app versions for each platform. E*TRADE has put a lot of effort into streamlining its experiences for target users while still loading them with readily accessible features and tools. E*TRADE’s web-based platform is the original and offers the tools investors need to research investments, track the markets, and place trades. Power E*TRADE offers more sophisticated, active traders tools for charting, analysis, and historical data for stocks, options, and futures trading.3 

Usability Verdict: E*TRADE

Sophisticated traders looking for a broker that offers maximum flexibility, customization, and investing options would be best suited for an account with IBKR. New investors and traders looking for a reliable platform that is a bit more intuitive in its functionality may find that E*TRADE is a better fit.

Trade Experience

Desktop Experience

As mentioned, Interactive Brokers offers investors Trader Workstation (TWS), an all-in-one platform that allows active traders to invest in world markets in a variety of currencies. With TWS, you can immediately transmit orders from the chart using hot buttons and set alerts based on time, price, margin, and other criteria. You can also choose from over 120 technical indicators and overlays to add to charts and scan world markets for undervalued stocks using the ChartTrader tool.4 Cryptocurrencies have also been added to IBKR’s investing menu recently, giving traders even more options.5 

E*TRADE offers two levels of trading experience, with Power E*TRADE being the more robust platform. Power E*TRADE has tools aimed at traders, including charting tools and an expanded trade ticket that includes projected profit and loss for your order.6 Despite the advanced features and customization offered through the trading platform, E*TRADE does not offer investing in world markets with different currencies (or in cryptocurrencies) at this time.

Desktop Experience Verdict: Interactive Brokers

IBKR definitely edges out E*TRADE with the consolidated platform and ability to trade in multiple world markets and different currency types. However, if you are looking for a more straightforward trading platform for domestic investing, E*TRADE may be the better option.

Mobile Experience

IBKR offers three different mobile apps for different types of investing: 

• IBKR Mobile mirrors the Trader Workstation trading platform with the ability to trade and execute orders in the same asset classes, and provides similar research, screeners, and strategy tools.
• IBKR GlobalTrader is a new international trading app that allows investors to deposit funds in their local currency and easily make trades on the go. Traders can access 90+ global stock exchanges in North America, Europe, and Asia.7 This app is ideal for domestic and international investors seeking worldwide market access.
• Impact is IBKR’s mobile app created for investors interested in environmental, social, and governance (ESG) investing. 

E*TRADE offers two mobile apps, which correspond directly with the type of investing account chosen:

• E*TRADE offers basic investing for the novice or less active trader.
• Power E*TRADE offers robust charting, analysis, and screening capabilities geared toward the more sophisticated, active trader. 

Mobile Experience Verdict: E*TRADE

IBKR has made progress in making its platform easier to use, and that includes the GlobalTrader app and the IBKR Lite account type, but E*TRADE wins in this category for its straightforward app design and ease of use.

Range of Offerings

IBKR and E*TRADE both provide a full spectrum of the typical investment offering that includes stocks, ETFs, bonds, and mutual funds. Beyond the typical, however, IBKR stands out from E*TRADE with the wide variety of assets and markets it offers access to. IBKR has added cryptocurrencies to its list in addition to already offering access to international exchanges, forex trading, and many more no-load, no-fee mutual funds than E*TRADE offers.

Range of Offerings Verdict: Interactive Brokers

There are really no brokerages that can match the asset breadth and depth that Interactive Brokers offers.

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Order Types

Interactive Brokers offers access to over 100 order types and algos, also offering third party algos to provide additional order type selections for clients.8 Very few platforms can approach the level of position entry and exit control enabled by IBKR’s wide selection of orders. 

E*TRADE offers a more basic range of order types giving investors several ways to enter, exit, and protect stock trades, including: contingent, bracketed, one-triggers-the-other (OTO), one-cancels-the-other (OCO), and one-triggers-a-one-cancels-the-other (OTOCO) orders. It is also worth noting that the mobile app has a more constrained selection of orders.

Order Types Verdict: Interactive Brokers

Interactive Brokers has a large edge over E*TRADE when it comes to order types.

Trading Technology

IBKR also offers SmartRouting to investors with a Pro account. SmartRouting automatically transmits the best available prices for stocks, options, and combinations across exchanges, which evaluates each leg of the transaction and constantly assesses rapidly changing market conditions and has the capacity to redirect all or part of an order seeking to accomplish optimal execution. For February 2025, IBKR reported their clients' total trading cost as 4.0 basis points or 0.031% of trade value.9

E*TRADE implements advanced order routing technology to seek the best execution available in the market. According to a statistical report, E*TRADE is able to fill its S&P 500 orders at or better than the National Best Bid or Offer (NBBO) 98.39% of the time, execute 89.41% at a price better than the NBBO, and maintain an average of 0.14 seconds order execution speed. E*TRADE reported net price improvement of $8.62 per order.10

Trading Technology Verdict: Tie

While both brokers offer their own version of smart or advanced order routing, a direct comparison is tough here because of the lack of standardized data. Overall, the price improvement and payment for order flow (PFOF) stats suggest IBKR does it better, but the broker also caters to larger traders doing larger orders, and E*TRADE likely has more retail traders with trades under the 100-share reporting threshold. On the other hand, E*TRADE does offer in-house tools for backtesting investment strategies with a paper-based demo account, whereas Interactive Brokers only offers backtesting through a third-party application programming interface (API). There is no clear winner between these two in trade technology.

Costs

Interactive Brokers commission and fee schedules can be quite complex to figure out. Actual costs vary depending on whether the investor has an IBKR Lite account or IBKR Pro account, and depending on the country from which the client is trading. However, IBKR does offer low commissions on products across 150 global markets, with no added spreads, ticket charges, platform fees, or account minimums.11

E*TRADE has a much more straightforward pricing plan, with no difference in fee schedules for account type. One notable fee difference for basic investing is for options contracts, with active traders (those making 30 or more trades in a quarter) getting a reduced fee of $0.50 per contract, as opposed to those making 29 trades or less per quarter, who pay the standard price of $0.65 per contract.12 

A key difference, however, is found in the margin rates, with IBKR Lite charging 6.83% for $100,000 (Pro 5.83%), while the corresponding margin rate at E*TRADE is 11.45%, giving IBKR the advantage in the cost category.1314

Costs Verdict: Interactive Brokers

Although the pricing is complex to figure out, heavy traders will find much more to trade for less at Interactive Brokers.

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Research Amenities

Interactive Brokers provides several free sources of real-time research, news, and analysis for investors. There are also a number of additional paid services that investors can subscribe to, many offering a free trial period. Research services are also conveniently accessible to investors with demo accounts and do not require an account application to be approved or funded.15 Additionally, IBKR has PortfolioAnalyst, which is a professional-level investment analysis tool.

E*TRADE offers a sizable suite of investing tools, screening functionality, and research capabilities for traders. Stock, mutual fund, ETF, and options screeners come with many different filtering settings and charting abilities. Research, market news, and several educational tools are featured in E*TRADES Insights.16

Research Amenities Verdict: Interactive Brokers

IBKR easily has the edge in this category with the vast array of real-time research and news from both in-house and external sources, while E*TRADE offers more general market insights and investing information.

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Portfolio Analysis

Interactive Brokers provides both individual and institutional investors with PortfolioAnalyst, an advanced portfolio management software and account aggregation system that allows investors to consolidate, track, and analyze their portfolios for a complete financial picture. The system provides real-time monitoring and powerful on-the-go analytics. Investors can add investment, checking and savings accounts, credit cards, annuities, mortgages, student loans, and more to get an overall comprehensive picture of their financial situation.17 IBKR also has the ability for traders to keep a detailed trading journal.18

E*TRADE offers several useful portfolio analysis tools. Reports and analyses are furnished in real time and customized to your particular interests. An aggregator tool allows investors to link external brokerage accounts for a comprehensive portfolio view. 

Portfolio Analysis Verdict: Interactive Brokers

Both IBKR and E*TRADE offer insightful portfolio analysis tools for investors to assess their portfolio holdings. However, Interactive Brokers edges out the competition here with its ability to link more than just brokerage accounts to give the investor an assessment of their overall financial situation, as well as providing investors with one of the most comprehensive trading journals in the industry.

Education

Interactive Brokers offers traders several free resources for investor education. Investors can go to the IBKR Campus to find the informational resources they need. Traders’ Academy helps traders learn how to make investment decisions regarding equities, fixed-income, options, crypto, futures, forex, and more. Investors can also learn how to more effectively use IBKR's trading tools, including how to navigate Trader Workstation (TWS), IBKR Mobile, Client Portal, and TWS API applications. Traders’ Insights provides investors with financial analysis, webinars, podcasts, blogs, and videos. Student Trading lab is another valuable, educational tool that allows for paper trading practice. IBKR also offers multi-language tutorials to aid international investors. 

E*TRADE has been able to greatly expand its education offerings for investors since joining forces with Morgan Stanley. Investors can start at the “Insights” tab and go from there to decide what type of educational information they need, including investing basics, advanced trading, retirement planning, tax planning, market news, thematic investing, and more. In each of these areas, investors can find videos, articles, classes, and market commentary. E*TRADE also offers investors a simulated trading platform in which to test out trading strategies without risking real money.

Education Verdict: Tie

IBKR and E*TRADE both offer a multitude of educational resources. Interactive broker's resources are higher level and best suited for the more advanced investor. Conversely, E*TRADE’s educational resources tend to be geared more toward beginning investors.

Customer Service

IBKR provides 24-hour customer service each business day via telephone through regional Client Services Centers. Even though there are live agents available, Interactive Brokers encourages investors to look through the “Quick Tips,” which are designed to answer basic client questions.19 Existing clients, as well as clients in the application phase, are encouraged to submit formal inquiries via the Message Center located within Account Management or via the email link on the support page because inbound communications sent via commercial email are not supported due to security and spam concerns. IBKR also has an AI-powered IBot that can help users navigate their content. IBKR offers live, online chat services to current and prospective clients 24 hours a day Monday through Friday, and 1 p.m. to 7 p.m. (Eastern) on Sundays.20

E*TRADE offers 24/7 customer service via phone, in which investors can speak to a customer service representative, brokers, retirement specialists, financial consultants, active trader consultants, and product specialists. Of course, clients also have access to the FAQ page to answer any general questions. 

Customer Service Verdict: Interactive Brokers

Both brokers have you covered 24/7, but we give Interactive Brokers the edge for offering a wide variety of contact methods and a bot to help existing customers find their own way.

Security

Both IBKR and E*TRADE provide investors with security standards, such as two-factor authentication, biometric identification, and security guarantees, which are typical within the industry.2122

Investor accounts at Interactive Brokers are protected by the Securities Investor Protection Corporation (SIPC) for up to $500,000, with a cash sub-limit of $250,000. Excess SIPC coverage provides up to an additional $30 million, with a cash sub-limit of $900,000, subject to an aggregate limit of $150 million.23 For accounts in excess of $1 million USD, a digital security card is available as well.21 E*TRADE is a member of SIPC, which protects customer accounts up to $500,000 for securities and cash (including $250,000 for cash only). However, E*TRADE clients will be covered under the Morgan Stanley excess of SIPC supplemental insurance policy, which has an aggregate limit of $1 billion. This amount is above and beyond the required insurance by SIPC.24

Security Verdict: Tie

When it comes to security, your account is safe with either of these brokers.

Account Types

IBKR offers a wide range of account types for both individual and professional investors, with international accounts available to those living outside the U.S.25 

Individual account types include:

• Individual and joint brokerage
• Retirement: traditional, Roth, rollover, and inherited individual retirement accounts (IRAs)
• Custodial: UGMA and UTMA
• Trust26

Professional account types include:

• Family office
• Small business: corporation, partnership, LLC, and unincorporated legal structure
• Advisor 
• Money manager
• Hedge and mutual fund
• Institutional
• Proprietary trading group 
• Broker & FCM26

E*TRADE customers can choose from an extensive offering of account types: 

• Individual brokerage accounts
• Custodial accounts
• Coverdell education savings account (ESA)
• Traditional individual retirement accounts (IRAs)
• Roth IRAs
• Rollover IRAs
• Beneficiary IRAs
• IRAs for minors
• SIMPLE IRAs
• Simplified Employee Pension IRAs
• Savings accounts
• Checking
• Line of credit27

Account Types Verdict: Tie

While both companies offer the standard array of basic account types, each company has nuanced offerings that differentiate it from the competition. IBKR offers several professional account types, while E*TRADE offers educational savings accounts and standard banking accounts, such as checking, savings and lines of credit. No clear winner here, as it depends on the mix of account types that an individual is looking for.

The Bottom Line

Interactive Brokers and E*TRADE are key players in the financial brokerage industry. Both offer a full array of trading products, account types, customizable platforms, functional trading apps, investor education resources and research, and low costs. IBKR’s platform and research is more focused on the advanced trader, although the company has added IBKR Lite to attract less active traders. While E*TRADE offers an easy-to-use platform and investing basics educational resources that cater to novice investors, the company’s merger with Morgan Stanley has allowed it to offer more to attract sophisticated traders as well.28

In the end, personal preferences will determine which platform style fits a particular investor’s needs best. If you are looking for an easy-to-use investment platform with room to grow into more advanced features, then E*TRADE fits that need well. You can also move more of your financial life to E*TRADE with its selection of banking accounts. If you are looking for top-end trading tools and access to global markets, however, it is hard to find a broker that has a stronger overall offering than Interactive Brokers.

How We Picked the Best Online Brokers and Trading Platforms

Providing readers with unbiased, comprehensive reviews of online brokers and trading platforms is a top priority for Investopedia. We combined our industry research, subject matter expertise, and investor survey data to guide the research and weightings for our 2024 online broker awards. To collect the data, we sent a digital survey with 110 questions to each of the 26 companies we included in our rubric. Additionally, our team of researchers verified the survey responses and collected any missing data points through online research and conversations with each company directly. The data collection process spanned from Feb. 19 to March 19, 2024.

We then developed a proprietary model that scored each company to rate its performance across 11 major categories and 89 criteria to find the best online brokers and trading platforms. The score for each company’s overall star rating is a weighted average of the criteria in the following categories:

Additionally, during our 2024 research, many of the companies we reviewed gave us live demonstrations of their platforms and services via video conferencing methods and also granted our team of expert writers and editors access to live accounts so they could perform hands-on testing.

Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top online brokers and trading platforms.