Once you have decided to trade in stocks and funds (through online platforms or exchanges) to build future wealth, the common perception is that market is so competitive that having to sift through all the available brokers can give you a major headache.
Choosing a broker to trade with can be a very overwhelming task especially if you don’t know what you should be looking for. We will briefly discuss the qualities you should look for when picking the right broker.
Security – The first and foremost characteristic that a good broker must have is a high level of security. After all, you’re not going to hand over your hard earned money to a person who simply claims legitimacy, right?
Fortunately, checking the credibility of a broker isn’t very hard.
Fortunately, checking the credibility of a broker isn’t very hard. Almost every country has regulatory agencies that has a list of authorized brokers on their websites, which helps a great deal to separate the trustworthy from the fraudsters.
• In the UAE it is Securities and Commodities Authority (SCA).
• In India it is SEBI – Securities and Exchange Board of India.
Before even thinking of entrusting your money with a broker, make sure that the broker is a member of the regulatory bodies mentioned above. Services of brokers whose names are not on that list, shouldn’t be used.
Transaction costs – No matter what kind of trader you are, like it or not, you will always be subject to transaction costs. Every single time you enter a trade, you will have to pay for every service provided or a commission, so it is only natural to look for the most affordable and cheapest rates. Sometimes you may need to sacrifice low transaction for a more reliable broker.
Don’t compare only commissions; compare other costs, too, like the most common margin interest (Margin interest is what is charged by brokers when traders purchase instruments like stock on margin (collateral) and hold it overnight.) and other service charges, a topic we will explore in-depth later in this guide.
Transaction ease – Good brokers will allow you to deposit funds and withdraw your earnings hassle-free, from the brokerage account set up. Brokers really have no reason to make it hard for you to withdraw your profits because the only reason they hold your funds is to facilitate trading.
Your broker only holds your money to make trading easier so there is no reason for you to have a hard time getting the profits you have earned. Your broker should make sure that the withdrawal process is speedy and smooth.
But if you are facing a hard time with the most vital of tasks such as these, it’s probably the right time to change your broker.
User-friendly platform – In online trading, most trading activity happens through the brokers’ trading platform. This means that the trading platform of your broker must be user-friendly and stable.
When looking for a broker, always check what its trading platform has to offer. A checklist that you could go through could possibly be the following:
• Does the platform offer free news feed?
• How about easy-to-use technical and charting tools?
• Does it present you with all the information you will need to trade properly?
When looking for a broker, always check what its trading platform has to offer.
Customer Service – Although a lot of the brokers claim to be customer friendly, they aren’t perfect, and therefore you must pick a broker that you could easily contact when problems arise.
The competence of brokers when dealing with account or technical support issues is just as important as their performance on executing trades.
Brokers may be kind and helpful during the account opening process, but have terrible “after sales” support like when you are strapped for time and need a quick fix especially when you have money riding on a split-second decision.
Every broker is different when it comes to what fees they charge to trade and how much you’ll pay. Being aware of trading costs is important for managing returns in your portfolio, as excessive fees can seriously cut into your returns. Here’s what you need to know about trading fees and how to minimize them.
Trading Fees can best be described as the fee is paid to the broker in exchange for helping to facilitate the trade through its platform. Traditional brokerage firms also charges these fees.
Also called commissions, trading fees can be associated with different types of investments, including stocks, mutual funds, exchange-traded funds or options. These fees can vary widely based on the type of security being traded and the broker. Some brokers may offer a discounted trading fee if you’re trading large volumes of stocks.
Why trading fees matter is because the amount you pay to trade through your broker matters for one very important reason: fees can take a bite out of investment earnings. The more frequently you trade, the more you could pay in fees.
Assume, for example, that you want to open an investment account with $10,000 (Dh36,729.90) and invest $1,000 (Dh3,672.99) per month. You have your choice between two brokerages: one that charges the equivalent of 0.5 per cent in fees and another that charges 1 per cent in fees annually.
Besides the cost you’ll pay to trade stocks, mutual funds, ETFs or options, there are some others brokerages can charge.
The difference may seem negligible but over a 10-year period, choosing the second brokerage would cost you approximately $5,000 (Dh18,364.95) more in fees, assuming you earn a 4 per cent rate of return. Over a 30-year period, that would grow to more than $55,000 (Dh202,014.45) in additional fees paid.
Besides the cost you’ll pay to trade stocks, mutual funds, ETFs or options, there are some others brokerages can charge. Here’s a rundown of the most common fees you might encounter.
Brokerage fees – There are certain fees your brokerage can charge to hold your investment account. For example, you might pay annual fees, monthly account maintenance fees, inactivity fees, research fees, statement fees or transfer fees to move money between accounts or a fee to close your account.
Management or advisory fees – If you’re investing through a robo-advisor or a brokerage that offers advisory services, you may pay a separate fee for that. Advisory fees more often, you pay a percentage of your account assets under management.
For example, your advisor might charge you 1 per cent annually to manage your account. On a $100,000 (Dh367,299) balance, that equates to a $1,000 (Dh3,672.99) fee.
If you’re investing through a robo-advisor or a brokerage that offers advisory services, you may pay a separate fee for that.
Margin interest – Margin interest rate is what is charged by brokers when traders purchase financial instruments like stock on margin and hold it overnight. Since the trader is borrowing funds on margin, they will pay interest on the borrowed amount just like you would if you borrowed money from your bank. And they pass it on.
(For example, with 10 per cent margin you may buy $1,000 (Dh3,673) worth of shares while putting up just $100 (Dh367). That extra $900 (Dh3,305) is granted to you in the form of a margin loan, for which you will have to pay interest.)
The trend began last year when brokerage Schwab announced that it was eliminating trading fees, kicking off similar announcements from the likes of E-Trade and Fidelity. Some of the biggest brokerages in the world to eliminate trading fees include: Charles Schwab, TD Ameritrade, E-Trade, M1 Finance, Webull, Fidelity, Ally Invest, Vanguard.
Commission-free trading means that you get to hold on to more of your investment earnings, but there are a few caveats to keep in mind. The biggest is that commission-free trading doesn’t necessarily apply to every security or assets that you can trade through an online broker’s platform.
Before we end – how to open a brokerage account?
A brokerage account is an investment account you open with a brokerage firm, using it to buy investments.
The broker holds your account and acts as an intermediary between you and the investments you want to purchase or sell. If you want to purchase and manage your own investments, a brokerage account at an online broker is for you.
Setting up a brokerage account is a simple process — you can typically complete an application online in under 15 minutes.
Once you’ve opened the investment account, you’ll need to initiate a deposit or funds transfer, which is mostly given in a step-by-step easily understandable form in most websites. Once the transfer is complete and your brokerage account is funded, you can begin investing.
However a key risk to keep in mind is that you might be asked if you want a cash account or a margin account.
A margin account allows you to borrow money from the broker in order to make trades, but you’ll pay interest and it’s risky. Generally, it’s best to stick with a cash account at first.
When choosing an online stock broker, experts say fees, platform features and security are some key considerations.
You then link it with a trading account, buying and selling using the broker’s platform and moving money in and out of the investment account after the trade is settled.
When you place an order, the technology enables the brokerage to interact with all the securities exchanges looking to execute trades, while those exchanges simultaneously interact with all the brokerages. You then have the option to select your choice of order types. Market orders execute immediately. Limit orders can be set to execute only at a certain price, within a certain time limit ranging from immediately to anytime within a period of months.
These choices are available simultaneously to all investors using the system and must work in real-time.
A computerized engine performs a high volume of trades each minute, and all work is backed up and accessible to be reviewed by investors, market makers and government regulators.