In this article, I will explain how to choose a good broker.
Every platform caters to specific investment needs so you need to compare them in order to choose one that will help you reach your objectives.
Here are 6 useful tips to help you choose a good broker.
1 – Minimum Investment Amount
Generally, brokers offer 3 types of accounts:
- A basic account which allows you to buy and sell standard products such as stocks, bonds and index funds.
- A premium account which allows you to buy sophisticated assets (options, warrants, short selling), use limited leverage (debt), access educational resources and better spreads.
- A professional account which allows you to buy sophisticated assets, use maximum leverage, get better spreads and access extra features (top of the line trading platform, educational resources, dedicated broker, etc).
Basic accounts are usually free to sign up for and most brokers don’t require minimum investment amounts. Usually, a basic account will meet the needs of the vast majority of investors who are just looking to grow their savings passively over a long time horizon.
Premium and professional accounts are destined for sophisticated investors who want to do active investing (trading) and individuals investing very large sums. Opening these types of accounts often requires minimum amounts of $10K for premium accounts to $200K or more for professional accounts. Also, you may need to pay a monthly subscription.
You need to inform yourself before you sign up to a brokerage to make sure you get the type of account that corresponds to your profile and needs.
2 – Available Products and Markets
Having access to the right types of products and markets is crucial.
All brokers allow you to buy stocks, bonds and index funds, but not all of them offer Forex, futures, commodities and cryptocurrencies. Make sure the broker you choose offers the products you want to buy.
Most brokers allow you to buy stocks on European and American stock markets. However, not every broker will give you access to ‘exotic’ foreign markets. Make sure the broker you’re signing up for allows you to buy stocks on the foreign markets you’re interested in. Just keep in mind that buying stocks on these foreign exchanges incurs higher commission fees than US stocks.
Lastly, be aware that having access to foreign markets doesn’t guarantee having access to every stock trading on those markets. For example, I signed up to a broker who only offered the most popular stocks trading on the US markets. I didn’t do my due diligence beforehand and I had the unpleasant surprise of not being able to buy the smaller-cap stocks I wanted to invest in. Turns out the platform was targeting active investors, not value investors. I had to abandon that platform and sign up to a new broker, which took a lot of time I could have spent researching which stocks to buy.
3 – Commissions & Fees
The fierce competition between brokers has reduced fees to the max. These days, only banks charge you opening fees and outrageous transaction fees.
Most brokers offer very low commissions – some even offer zero commission on certain products. However, not all brokers have the same policy when it comes to transaction fees. Some offer 0% transaction fees on all products, others offer 0% transaction fees after you reach a certain monthly transaction volume, while others charge low transaction fees.
Fees are often very low for stocks trading on US stock markets but they can be much higher for stocks trading on other markets. For example, one broker I use charges me just 0.50€ to buy American stocks, but charges me 7.50€ to buy a stock on the Frankfurt stock exchange and 7.50€ to sell it; in total, I have to pay 15€ to buy and sell a stock there. I didn’t know this before buying this stock and I was shocked. Analyze the transaction fees policy to avoid bad surprises.
Please note: Low commission fees can have hidden costs. Cheaper platforms are usually more unstable than more expensive ones. During periods of high market volatility, cheaper platforms have a tendency to crash. This means that you won’t be able to access your portfolio and make transactions. This can be very damaging to your profitability which is why some investors prefer paying higher transaction fees in exchange for a more reliable platform. Indeed, by charging higher fees, brokerage firms can invest to make sure their platforms are more reliable and stable.
How do brokers make money if transaction fees are so low? By charging you fees for various services they can offer you. Here are some services brokers will charge you for:
- Transferring portfolios between brokers
- Transferring a stock to another stock market
- Signing you up for a general assembly
- Inactivity fees
- Commissions for depositing money by card of Paypal
- Commissions on exchange rates
In sum, make sure you analyze the broker’s fees in order to avoid unpleasant surprises when you start investing.
4 – Security Policy
What happens if the broker goes bankrupt? Do you lose your investments?
Thankfully, brokers have enacted safeguards that protect your assets in case your broker goes out of business. The vast majority of brokers deposit your assets on a separate account, which means they can’t conduct commercial operations with your them. This is extremely important because it means that the broker can’t liquidate your assets to pay off his debts.
However, this usually does not apply to sophisticated products and cryptocurrencies. When you buy these products, you are negotiating a Contract For Difference (CFD) which means you are only benefiting from the price variation of the underlying asset; you do not own it. For this reason, I discourage people from buying cryptocurrencies from stock brokers because ownership of th coins is very important. I will publish an article on how to invest in cryptocurrencies in the future.
Lastly, make sure that the broker is regulated by a financial markets authority in the country where it is incorporated and the country where you reside.
5 – The Extras
If you want to do active investing, a basic platform will not be adapted to your needs.
To do this, you will need advanced features such as alerts, hot keys (shortcuts allowing you to place orders quickly), low spreads and the guarantee that the platform wll not crash during times of high market volatility.
Some brokers also offer educational content and forums where you can learn how to invest and share ideas with their community. Some sites also organize live summits for premium and professional members where you can meet and network with professional traders and investors.
Access to these extras is not free and you may have to pay a monthly subscription or have a minimum amount of money invested with the broker (usually in the hundreds of thousands of dollars).
Keep in mind that the internet offers plenty of free resources but it’s often difficult to identify the quality, trustworthy content. This is why some people prefer to pay to have access to resources selected by investment professionals.
Last extra worth considering: fractional shares. Normally, you have to buy shares in units of 1. These days, brokers allow you to buy fractions of shares (for example, half a share, A and a half shares, 2.4 shares or 13.25 shares, etc), meaning you can invest in expensive stocks even if you can’t afford a full share; This makes investing accessible to people who have tight budgets. However, not all brokers offer this feature so make sure you look into that before you sign up.
6 – Customer Service
The last thing you should consider is the broker’s customer service.
This is a crucial aspect often often underestimated by investors.
People don’t realize that they will need to contact their broker from time to time. When the moment comes, you want to be sure that you’re dealing with professionals who answer you quickly, nicely and expertly. If not, you will lose time and money.
Before you sign up, send the brokers an email or call them: do they answer quickly? Are they nice? Do they answer all of your questions? If the answer to all of these questions if YES, then that is a very good sign. Usually, good customer service means that the overall quality of their platform is up to par.
Thank you for reading.
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DISCLAIMER: This article is the fruit of my personal research and should not be viewed as financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.