Discussion Topic: Choosing the Best Stock Broker
Today, in this article, we will discuss that how you can select the best and right stock broker to start with. It’s often a question in the mind of beginner traders that how they will choose the best stock broker for their trade. We will answer that questing through this article.
How This Article Will Help you Choose the Best Stock Broker
With the advancement of online trading, the stock trading has witnessed a rapid growth in the number of stockbrokers offering services in the stock market.
In this situation, however, the decision of where to open a stock trading account (or brokerage account) has evolved become more evidential and relevant. With so many brokers available within a small market, choosing which stock broker to trade with can become a very troublesome task especially if you don’t know what you should be looking for.
To make this easier for you, in this article, we will discuss the qualities and parameters you should look for when selecting a suitable stock broker.
Qualities You Must Check Before Choosing a Stock Broker
Though choosing the best broker is not an easy task, we are going to provide 8 qualities which you must check and compare before choosing your stock broker and opening an account.
Quality 1: Authenticity of the Broker and Brokerage Firm
It is very important to exercise a thorough background and authenticity check of the broker (and also brokerage firm) before opening an account. Enquire about the past performance of the broker, how many years is he working in the stock market, and search for client reviews.
Moreover, In order to avoid being duped into frauds, it is highly recommended that you go to the website of the financial regulators or stock exchanges of your country and check if the broker is listed in their authorized broker list.
For Example, In India, you can go to SEBI's website to check for the authenticity of a broker. For checking USA based stockbrokers you can visit the website of NASDAQ or NYSE to check the authenticity of a stock.
Below is a list of countries with their corresponding regulatory bodies:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
- France: Autorité des Marchés Financiers (AMF)
- Canada: Office of the Superintendent of Financial Institutions (OSFI)
- India: Securities and Exchange Board of India (SEBI)
Quality 2: Customer Service
Brokers and their trading platforms can’t be absolute fault free (it’s natural), and therefore you must pick a broker whom you could easily contact in case of any when problems.
Take a note that, brokers may be very kind and helpful during the account opening process, but may have terrible “after sales” support. The expertise of brokers when resolving any account or technical issues is equally important as their performance on executing trades.
You should open the trading account with a broker who has a responsive customer service team and can provide you answers to all your questions or resolve any issues that may occur.
Our suggestion: Before opening a brokerage account, make some dummy calls/emails to their customer service to see the response time for your queries.
Quality 3: Minimum Account Balance Requirement
Sometimes brokers ask you to deposit a minimum amount while opening a brokerage account. They might also have the requirement to maintain a minimum account balance throughout the year.
This is purposely done for a few reasons. First of all, small accounts do not worth that much to those big brokerage firms. Secondly, many mutual funds also require minimum investments, which means even if you open a brokerage account with small deposit amount, it would be hard for you to invest in many profitable funds.
So, it's very important that you inquire about the minimum amount that has to be kept in your account. You can compare different brokers, as this requirement varies significantly from broker to broker.
There are also many reputed brokers who have no restriction on minimum balance.
Quality 4: Commission and Fees
No matter what kind of stock trader you are, you will always have to pay some fees. You may be charged for opening an account, an annual maintenance fee, and broker’s commission for every trade you place.
The cost of trading varies from broker to broker. Full-service brokers charge more commission than online discount brokers. The commission on delivery trade (CNC) varies in-between 0.01% to 0.5%, whereas commission for intraday trades (MIS) varies in-between 0.01% to 0.05%. The broker may charge a fixed commission or may charge according to trade volume. See our guide on different stock order types.
Broker's commission greatly affects your returns as, higher the broker’s commission, the more it will hit your pocket every time you place a trade. Make sure you compare the commission structure of different brokers before opening an account with a particular broker.
But don’t go blindly for low commissions, sometimes it is worth to sacrifice low transaction rates for choosing a more reliable broker. It’s all about finding a healthy balance between low transaction costs, security, and services offered.
Our suggestion: if you are beginner investor, search for a broker who has a simple commission structure.
Quality 5: Ease of Deposit and Withdrawal
Good stock brokers will offer you user-friendly ways to deposit funds and withdraw your earnings.
The only reason for brokers to hold your money is to facilitate a smooth trading experience. So, there should not be any reason for you to face issues at the time of withdrawing the profits you have earned. But still, many brokers have a minimum balance requirement that can restrict you from withdrawing your money.
So, search for a broker who has a good reputation for speedy and smooth deposit and withdrawal process.
Quality 6: Evaluate Trading Platform
In online stock trading, a majority of the trading activities happen through the brokers’ trading platform. This implies that the trading platform provided by your broker must be easy to use and stable.
While choosing a broker, always check the list features that their trading platform is offering. Some common features to be checked: Are the analysis and charting tools user-friendly? Does it provide any free news feed or price alerts? Does it provide you all the information you need to decide on a trade?
It is highly advisable to ask for a demo of their trading platform so that you can experience their platforms before starting the actual trading.
Quality 7: Full-Service Brokers vs. Discount Brokers
Practically, every broker is different in terms of their style of customer services.
Some may introduce themselves as “full-service” brokers offering access to a variety of trading platforms and services; while others may offer discount brokerages and offer a basic array of services.
Some of them may even promise to allot a dedicated account manager for you, who will be your direct contact in case of any issues.
As the name suggests, full-service brokers offer many extra services to investors than discount brokers, but they charge a higher commission to provide these services. A full-service broker also provides more one-on-one advice, do the market research for investors, and even provide personalized suggestions.
On the other hand, discount brokers would not offer that much to you, rather, they will just facilitate a trading environment to you. The facility is that they will charge you much less commission compared to those full-service brokers.
For younger investors, we recommend discount brokers as taking service from full-service brokers may not be financially feasible for them. Besides, in this growing age of online discount brokers, they are also providing a vast array of tools to help inexperienced investors. Moreover, if you choose a discount broker and do the market research by yourself, you'll learn lots of new things about stock investment.
Quality 8: Margin and Leverage
The last thing to consider is the amount of leverage and margin the broker is offering for intraday trading.
A margin is basically a type of loan offered by brokers that allow traders to leverage their initial capital. So, getting a good margin means you can trade for more amount than that you actually hold in your account.
This amount varies significantly from broker to broker. It can vary from 2:1 to up to 50:1 (or even more) depending on the broker.
However, you should be aware that taking high leverage is a risky business. It is a double-edged sword. That means leveraged trades can multiply your profits in a favorable day, but can also multiply your losses in a bad day. See our guide on using Leverage and Margin.
How to Choose Stock Broker – The Conclusion
A wide range of choices among stock brokerages makes it difficult for any investor to take the decision of whom to work with. However, if you follow these eight basic guidelines, you probably would be able to choose the best broker for you.
Also, make a note that, the secret of selecting the best broker is to find a balance between all the qualities. Choosing a broker who complements your trading style will greatly help you to reduce trading costs, and maximize the efficiency & security of trading activities.
We hope that you have enjoyed the above article guiding you on choosing the best broker for your stock trading needs. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about selecting your stock broker, we will be happy to help you.