If you want to invest in the stock market, you’ll need to find a stockbroker to buy and sell for you.
But with dozens of stockbrokers to choose between, how do you know which one is right for you? Whether you’re a frequent trader using one of our live alert services to enter and exit positions during the day, or you’re managing a portfolio that turns over stock on a far less frequent basis, selecting a broker to meet your needs is essential.
As the number of smaller investors taking the management of their savings into their own hands continues to grow, there’s no shortage of brokers and online execution platforms jostling for your deposit, and fierce competition means many firms offer attractive discounts and promotions in order to secure new accounts. But special offers certainly shouldn’t be your only consideration when choosing a broker – take the time to research and compare different firms – you’ll probably stick with the same broker for many years, so it’s important to make the right choice.
Below, we explain the differences between the many types of stock brokerage services that are available, and provide ten useful tips for comparing the different features and benefits that firms offer.
TIP #1 – Decide Where You’ll Invest
If you only plan to invest in shares listed in your local stock market, then in most countries you’ll have plenty of brokers to choose from. If you want to invest in some foreign markets, you may have very limited options.
A good first step is to decide where you will invest. If it’s just in shares that are listed on the stock exchanges in your own country then there will be plenty of firms to choose between. However, if you want to invest in more esoteric overseas assets on foreign markets, then your options may be more limited. You’ll need to check to make sure that any firm you are considering can provide access to buy and sell stock on the exchanges that interest you.
It is possible, of course, to have multiple accounts with different brokerage firms. This will enable you to take advantage of the access to specialist markets that each one is able to provide. Usually the most convenient approach is to try and cover the majority of markets with just a few accounts, meaning that you won’t have to open a new account each time you want to invest in a stock that’s listed in a different country.
TIP #2 Find Out About Fees
While most investors are very aware of commissions, and center their efforts on trying to minimize these when they compare brokers, there are actually a whole range of additional costs that brokers may charge, and these can quickly add up. It is common for firms to advertise low commissions in order to attract new customers, but charge significant fees for account maintenance, market data and charting, and currency conversion.
It’s important to try and estimate what the costs of managing your portfolio over the course of a full year will be, rather than focusing entirely on the commissions for a single trade.
TIP #3 Shortlist the Features You’re Looking For
There are essentially three different types of services offered by stock brokers, and you’ll need to select the right kind of firm based on your needs.
Discount brokers offer a very minimal service for self-directed traders, sometimes providing nothing more than execution of your order. You’ll need to make all your own investment decisions and then place an order to buy or sell stock with the broker, typically online.
Full service brokers provide research and analysis to support your investment ideas. This is only advice, and the broker will not make investment decisions on your behalf or buy and sell stock without your permission.
Discretionary brokers are typically suited to clients with large portfolios who wish to have them actively managed, much like a hedge fund would do. These advisory services usually attract higher account management fees, though some investors will benefit from access to the additional support and experience on offer.
You’ll also need to think about how frequently you plan to invest, and how much money you will deposit. For frequent trading, high speed online execution is essential. Those with smaller account balances may find per-share commissions more cost effective than per-trade fees schedules.
TIP #4 Find Out How the Broker Fills Your Orders
Different firms enable you to access the market in different ways, and understanding these distinctions can be important to choosing the right firm.
Most brokers will fill your order with a market maker. Market makers constantly quote both a bid and an ask price to buy and sell a stock, and only accept orders from financial institutions and stock brokers, and don not trade directly with the public.
In other cases, especially with international stocks, the broker will submit your order directly to the relevant exchange (known as direct market access) where it will be filled by any interested counter party.
In some cases a broker will simply route your order to another broker in the country where the stock is listed, and they will transmit your order to the local market makers.
While none of this is directly relevant to how your orders are filled (unless you are a high frequency day trader), it can lead to additional costs each time you trade.
TIP #5. Avoid the Added Extras
While the deep discounts provided by most online brokers are dependent on the stripped down service they provide, this doesn’t mean to say that they won’t try and charge you for a whole range of additional trading services.
Some brokers will send you regular research newsletter and fundamental data on companies, or provide live intraday prices via a charting platform. While this information can be beneficial to active investors, you will probably find that much of it is irrelevant if you have a longer term trading plan. Moreover, you’ll probably be able to access similar or better product elsewhere at lower costs.
Consider carefully whether any extras that you subscribe to are really worth it before you invest in them.
TIP #6. Less is Sometimes More
Don’t be tempted by brokerage accounts purely on the basis of the dazzling array of services they might offer. In addition to dealing in shares, many firms will provide access to contracts for difference, futures, forex, financial spreadbetting, and other products and services. None of these are important unless you wish to use them, and many are highly leveraged products that are completely unsuitable for the average investor.
Furthermore, it is common practice for these additional services to be offered by the a third part under the broker’s brand, making these services far less transparent and more expensive than the firm’s core stock offering.
If you do require access to these products you will most likely find better prices by opening a separate account with a provider who specializes in them.
TIP #7 Ensure A Range of Services Are Covered
While having everything under the sun available under one account often isn’t the answer, you need to balance this with having enough flexibility to meet your needs as an investor, which are like to develop and evolve over time. You should therefore try to find a broker that has flexibility and a broad range of products within the particular services and markets that are important to you.
Here are some points to consider:
- Does the broker offer tax efficient account structures such as 401(k) and Roth IRAs (or ISAs and SIPPs in the UK)? If you’re a higher rate tax payer then tax can really eat into your returns, and it’s important to look for tax efficient options for your investments.
- Does the broker allow you to deposit and hold funds in multiple currencies? If you’re investing in foreign markets then this will be essential, and you’ll want to find a broker that is able to facilitate this without any additional charges. You’ll also need to consider carefully whether to convert your funds prior to depositing them, or to whether to allow the broker to do this for you as required.
TIP #8 Ask for a Free Trial
It’s often hard to judge how good a broker is purely on the basis of their website and promotional material. The best way to get a feel for a firm is to ask for a trial of access to their trading platforms (this is normally available via a ‘demo’ or ‘paper trading’ account). Trial access will also give you the opportunity to sound out their customer service with any issues you encounter.
TIP #9 Only Pay for Services You Need
Stock brokers generate their income entirely through the commissions and other fees that they charge their customers, so it is common practice for a firm to try and upsell you with additional products and services, or encourage you to trade at a higher frequency than your strategy requires. Resist the temptation to buy additional stuff that you don’t need.
Where you have a personal advisor at a full service brokerage, the income they earn is typically derived from the commissions their clients generate. While not all brokers will encourage you to over-trade, be aware that bad ones will, and don’t allow yourself to be cajoled into unnecessary trading.
TIP #10 Ensure Your Account is Secure
Though we’ve left this tip until last in our list, it’s probably the single most important aspect to consider when choosing a broker. Ensure that you only deposit your capital with reputable, well regulated firms, and are aware of how investor protection rules and compensation schemes can help to protect you in worst-case scenarios.
The greatest level of caution should probably be exercised when opening accounts in foreign jurisdictions where laws to protect your money may be less comprehensive. Opening overseas brokerage accounts is normally only advisable for experienced investors. Never deposit funds with some an unregulated firm or one that has demonstrated that it is unable to meet the requirements of regulatory bodies.