If you have decided to start independent trading on the stock market, then one of the most important decisions you need to make is to choose a broker. You should not take this task thoughtlessly: working with a dishonest broker you will lose money, even if you are a guru of investment analysis.
Now there are a lot of companies in the market providing their clients with the opportunity of independent exchange trading, and it is quite difficult to figure out this variety of counterparties to an inexperienced person. Anyway, it is important to address to the broker and not to the bank.
Photo: Flickr
Today I want to talk about how to choose the right broker from a wide variety of brokers. So, 10 basic moments on which it is necessary to pay attention to a choice of the broker.
1. A real broker, not a SCAM broker
Basically, all brokers can be divided into two categories: “real” and “SCAM”. A “real” broker earns on commissions that clients pay from each deal. Thus, he is interested in the success of his clients — the more money they have, the greater is the volume of transactions and, accordingly, the more commissions the broker receives.
“SCAM” brokers (and some CFD-brokers) work on the opposite principle: they are interested not in commissions, but your deposit. Such brokers, as a rule, work with zero commissions and are generous in various bonuses when depositing in the account.
There are two main schemes of work of SCAM brokers. Firstly, provoking clients to make risky trades: it can be an unreasonably high leverage (the credit provided by a broker against your capital security; in fact, the more leverage you have, the more profit/loss from changes in quotes), and various commissions for inactivity, and, on the contrary, all sorts of bonuses for activity. The idea is that the client loses his deposit as quickly as possible, which in fact, most likely does not exist anymore except in the form of meaningless numbers in the personal cabinet.
The second scheme of work consists in substitution of real quotes by those values which are beneficial to the broker, rather than to you — thus, most likely, in the contract with the broker about it will be ingeniously mentioned somehow, like “in the periods of high volatility of quotes can differ/be held back”. You will have the illusion of trading on the stock exchange, but in fact, you will not see the real market and work on it — you will only see a certain simulation of the market and lose the deposit in favor of the broker.
2. Serious regulation
One of the main rules is to pay attention to the jurisdiction in which the broker works (and in which his activity is regulated). People for some reason often neglect this rule, although the presence of a serious regulator, if not fully protect you from the risks of the counterpart, then at least significantly reduces them. Currently, there are three good jurisdictions: US, UK and MiFID (The Markets in Financial Instruments Directive) — and the majority of quality brokers work in one of them, not in offshore zones.
At the same time, it is important to take into account that Russian regulation is not recognized for work in foreign markets — it is necessary to open a legal entity abroad.
Accordingly, if you chose a Russian broker, you need to find out in which jurisdiction the license of his foreign subsidiary: the more serious the license is, the more guarantees the safety of your funds.
3. A wide range of tools
As a rule, a novice investor pays little attention to the set of financial instruments and exchanges offered by a broker. Indeed, for beginners, a great variety of available assets may seem to be something frightening or just irrelevant, but there are two important points to consider here:
- As a rule, many exchanges and financial instruments testifies to the quality of the broker.
- It is necessary to think about the future: maybe today you do not need such a variety of instruments, but what will happen tomorrow, when you will have a better understanding of the issue?
Believe me, having several brokers for different exchanges and asset classes is a questionable pleasure.
4. Multicurrency account
One of the important advantages for a novice investor will be the availability of a multi-currency account for trading various assets. For example, it is possible to trade Russian stocks (denominated in rubles) and American assets in dollars, without worrying about the transfer of funds from one currency to another — modern brokers have an automatic conversion of funds and the ability to work simultaneously from multiple accounts in different currencies.
5. Convenient terminal
A trading terminal is a program through which you can trade on the exchange. There are many different terminals, which differ significantly in their capabilities and usability of the interface.
Most brokers provide their clients with demo access and I recommend trying several terminals: it should be convenient for you personally. A few things can discourage you from trading independently on the exchange as quickly as a complicated and slow trading terminal.
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Photo: Flickr
6. Transparent commissions
Carefully study the structure of broker's commissions — some dishonest market participants like to advertise low commissions, “forgetting” to tell clients about various hidden payments: for terminal rent, for account maintenance, etc.
The ideal option is to pay only for the transaction. It is convenient, understandable, transparent and allows you to plan your actions in the market much better: you do not need to search for a million papers in which all commissions are written in small print to accurately calculate your costs for a particular transaction.
7. The structure of commissions should correspond to your trading strategy
Choosing a broker, you should at least have a rough idea of how often and to what extent you plan to enter the market. Some brokers have such a structure of commissions that it is profitable to make a lot of deals with them, while others, on the contrary, have the most “sweet” conditions for those who bought an asset and “forgot” about it for a long time. Accordingly, at least approximately estimate your planned level of activity in the markets and look at the brokerage commissions through the prism of your approach to trading.
8. Serious infrastructure
With the development of technologies, the broker's infrastructure becomes one of the main competitive advantages — the servers located on the largest stock exchanges (or next to them), allow you to execute exchange orders with minimal delay.
Yes, for a novice investor, in general, speed plays almost no role, but it is a good indicator of the broker's seriousness — if he is ready to spend significant funds on his infrastructure, it means he does not plan to run away with your money tomorrow.
9. Lack of proprietary trading
Proprietary trading is the independent trading of a broker at own expense. This creates serious risks for the client's funds: starting from the fact that the lost trader can “borrow” your money to hide the losses, and finishing with the broker's default.
If you turn to some large Western broker from the giants of the market, then with a probability of 99% he is engaged in prop-trading. I do not want to say that propping is a sign of an unfair broker. It is not necessary at all, but in any case, it is an additional risk. Why should I take it upon myself if I can't? Choose a broker who is not engaged in independent trading.
10. Size matters
This is the most important rule when choosing any counterpart. Your size and the size of your counterpart must be comparable, otherwise, the needs will not be met. Apple will never be serviced in any Tinyfundbank — a small bank simply will not have enough resources for such a giant. And, on the contrary, a small entrepreneur who owns a tent on the market will not apply to a big bank. The same is true for brokers: if you work with a relatively small broker, in some cases you can count on personal service, up to and including the addition of individual trading instruments at your request — this is completely impossible in the case of large players.