Brokers

How to choose trading brokers?

As an economist, I have been asked how to choose brokers to trade the financial markets. In this article in collaboration with AdonFinance.com. I would like to answer this question to the best of my experience and knowledge.

I would consider the following three main parameters to choose the right trading broker for me:

Level 1

Brokers Comfort level, Brokers scoring and Risk level

All banks or Brokers have a risk. All trades have counterparties. The broker enables the trade either through an exchange or Over the counter.

The risk or as it is sometimes referred to as “counterparty risk” is for the probability for the Bank or broker. Or a related third party to fail, thus losing my funds not due to trading but due to a business failure. This may sound theoretical. But I remember when as a broker a Client of mine had executed a Put Euro option, that was deep in the money and very profitable at Lehman Brothers. Naturally, the payout of a deep in the money option was much harder to collect after the Lehman brothers have collapsed.

What I describe as a broker comfort level. This is the level of comfort I have when putting capital in a specific Investment bank or a broker. Lehman Brothers are of course just one example of a failed financial institution, there are many stories of failed banks throughout the globe and time. Financial institutions have failed for numerous reasons, stories I will share with you in the future.

Regulated Vs unregulated

Leaving aside the different types of regulations that exist. Some trading platforms or sites are officially regulated while others might be unregulated. Obviously when dealing with an unregulated site my level of comfort drops. However, there are good sites that have a good reputation and are only partially if at all regulated. An example is crypto exchanges which offer unique trading options but are not regulated.

Regulated Brokers, including Stock Brokers, also vary. It could be general European or some kind of global regulation which is not compatible with your local residence. For example a U.K (FCA) or a Cyprus Stockbrokers regulations (CYSEC) or for a resident Germany or Dubai. In this case, this type of regulation is weaker or lighter than the regulation your local bank has. The higher the level of comfort I have in the Stock Broker or Bank, the higher the amount or percentage of my capital. I would consider putting in the specific Stock Broker.

Different types or regulations

Banks

Many times banks are regulated by central banks, Banks usually provide access to direct Stock trading. More often than not banks give for the retail investor lower leverage, sometimes with higher commission compared to other brokers, and fewer trading tools than specialized leveraged Stock trading brokers.

CFD Brokers

Providing leveraged or non-leveraged contracts for difference trading, usually at lower costs for the retail traders and with more trading tools such as social trading, chart and analysis.

Stock Brokers

Providing low leverage direct exchange access, usually with the more limited option for trading especially with regards to leverage and short selling.

Spread betting Brokers

Enabling short term relatively simple bets on stocks and other assets.

A list of the different types of Stock brokers can be found on the table at the top of the page.

Level 2

When choosing a CFDs or a Stock Broker some of the following parameters should be considered:

ECN, market maker or hybrid broker

Is the broker transmitting your trades to the markets, what is sometimes referred to as an ECN or is the broker acting as a market maker. Sometimes brokers are hybrids and hedge out only part of the trade to manage their exposure. Regular Stock Brokers can execute out to the relevant exchange with no usage of a market maker. While more exotic trading such as penny stocks sometimes require a market maker in the  OTC markets, to the counterparty the trader’s trade due to low liquidity.

Leverage and overnight fees 

If I want to speculate for the short or mid-term I might want my broker to give me higher leverage, this means more risk on the one hand but the higher potential for profits. This could be done by using leverage or turbo warrants. As a trader, I want to know my leverage options and their related cost. This cost many times are referred to overnight fee, which is the fee the trader pays as a commission for leveraging his capital with the broker.

Courses and education

Either on how to use the platform or research, market analysis and information relevant to the Stock or instruments I want to trade. Many brokers provide useful academy kits and videos enabling me a smoother entry to the market as a beginner trader. To view and receive free financial market online trading educational material, click here.

Signals and social trading

There are many quality forums and signal providers. Trading central, Seeking Alpha, the social trading of Etoro and others can be found in this link. Some services are free, others are at a cost to be paid by the trader and others are free for VIP traders as a service given by the broker for High volume trades.

It is important to understand who gives you the signal or advice and to understand if it fits your needs. Only your personal financial advisor sees the entire picture on the one hand however if you deposit a partial amount in your trusted stock broker. You can receive and share the best stock trading ideas. In the broker’s social network which sometimes could include thousands of experienced traders. Then, if you want to start social trading networks for stocks, cryptocurrency, commodities, forex and indices click this link.

Means of deposits and withdrawals

It is important to understand what is the process to deposit and withdraw funds from your stock broker. This will help you understand the paperwork needed, the wallets and payment methods available, and the time that will be required between your deposit or withdrawal request to the day that your request is delivered to your bank or broker account.

The cost of the transaction

Including spreads, fees, rollover costs when applicable, Overnight or other leverage fees. See this link for a comparison of CFD brokers and the relevant spreads and commissions for regular and VIP accounts.

My trading needs

Is my Stockbroker answering my trading needs, am I a swing trader, scalper, day trader or long term investor? Does the broker enable me to trade the way I want to trade in the asset classes I want? If I want to buy an exotic Crypto Mining company in a Canadian exchange. Will my broker enable this trade and what are the relevant commission.

Trading Experience

Some platforms offer very sophisticated trading tools but are harder to operate and there is no support. Other brokers give amazing service and support but are more expensive, before choosing a broker the trader needs to see what is his trading needs, what is the minimum or maximum trade size and choose the best broker the fits his specific needs.

Level 3

Choosing the best stock broker the fits my needs

As mentioned earlier each trader has its own trading needs, some want to buy physical crypto, others want to speculate on the price of the crude oil. Some will want social trading while others just want to buy and hold the main Stock index for 10 years. It is important to understand what type of usage you will have with your broker. And choose the best broker for your needs.

Some investors will have several accounts each with a different purpose. For example: ‘90% of the capital for long term holding of stocks and bond indexes. 5% of the capital allocated for leveraged short term speculative CFD scalping. And another 5% for crypto trading or long term holding (sometimes referred to as Holding).’

Asset classes

A trader might want to buy shares in companies i.e Stock, buy commodities either physical such as oil, silver or gold, Forex currencies or digitally such as bitcoin and Ethereum.

For a list of The Top United States Stocks assets see this link.

Long term investors vs short term speculators

What is the capital used for, is it a small amount that I can afford to lose or is it money that is needed to buy a house in six months. What are my time horizon and financial needs? Some brokers provide risky leveraged instruments as well as none leveraged low-risk instruments, By planning my financial needs I can best tailor the package of stockbrokers I can use to best suit my financial goals and needs.

Trading instruments

Derivatives and CFDs differ from stocks. Stocks differ from commodities. Am I Speculating, investing or hedging an exposure? These questions will help me choose and allocate best my capital between the different categories of brokers. A table with a list of brokers and their different Nish could e found in this link

Buying stocks through the CFD Trading platform or direct access to exchanges

Sometimes I Might need a CFD tool as the stock I wish to trade is more exotic and is not integrated into my main Account. For example, if I have capital with a bank that gives me access to Classic ETF and stock such as Nasdaq and Apple. I might choose to open a Broker account to buy crypto or Indian stocks or exotic leveraged turbo warrants traded in Nordic exchanges.

Best Brokers consensus and being a part of a trading community

By connecting to forums and regulators sites you can be kept up to date as to the latest updates, compliments or warnings regarding Stockbrokers. Traders not only buy stocks and share trading ideas. But they also recommend brokers to each other and discuss the advantages of each broker. By staying up to date and part of a trading community you enjoy the wisdom of more experienced traders as a beginner. If you are already a professional trader you might enjoy sharing your experience with beginners while still receiving added value.

Different types of currency

Not all brokers might enable trading in your preferred currency. For example, a trader from Australia might want to manage his account in Australian dollars (AUD). And the broker he has chosen enables an account in Euro or USD. This creates an exposure to currency fluctuation and possibly higher commission that although can be hedged needs to be taken into account.

Sub accounts

Does my broker enable Sub accounts? This enables the account holder to create an account below his main account that enables only trading but not withdrawal. This is an important tool for a corporate account or private account that wants to give access to a third party.

Referral links

Some brokers give back to the community by paying some commission back to an account that refers other traders to open an account with this broker. This creates a stronger community for the broker. And enables the user to receive benefits from the relative added value to the community created by each referral.