HOW TO SELECT A BROKER?
TRADING & INVESTING TERMS
What is a Broker?
A broker is a licensed person or an organization that acts as a middleman between a trader and stock exchange. Orders are only accepted from the members of the exchange who are usually licensed brokers and registered companies. Individual traders and investors require the services from stock exchange members for their trade execution. Brokers generally take commissions based on investments or sometimes they charge a fixed fee. For certain types of securities (e.g., Forex), brokers charge a spread (a small premium in the purchase and sell prices) instead of a commission or fixed fee. Brokers may also charge an interest for overnight holding of a position, which has margin or leverage.
Types of Brokers:
There are different kinds of brokers but the key types are-:
- Investment Broker: Investment Brokers help in conducting and executing purchase and sale of the securities.
- Forex Broker: Forex Brokers provide quotes for Forex trading (trading between a currency pair, e.g., USD to CAD) and execute the orders.
- Full-service broker: Full-service Brokers are those who provide additional services such as tax advice, retirement planning, trade planning etc. The fees of the full-service brokers are generally higher than the normal brokers. They are helpful for individuals who do not have enough time for financial planning or to manage their own portfolios.
- Discount Broker: Discount Brokers provides the execution and charting services at a lower fee. In this, the Traders generally have to manage their own portfolios. The broker only executes the orders on behalf of the traders.
- Direct Access Brokers: Direct Access Brokers allow Traders to trade directly with an exchange or with other individuals via electronic communication networks using sophisticated software. The key benefit of a direct access broker is the speed of execution. This minimizes the slip in order execution. Slip is the difference in the current price and the actual price at which the order is executed. Higher the latency in order execution, higher is the slip.
What to look for, while selecting a Broker?
There are various parameters, which affects the selection of a right broker. The type of broker varies based on the need of the Trader. Some of the key parameters to consider are:
- Asset classes to be traded
- Countries to be traded in
- Amount of margin required
- Amount of capital to be deployed
- Commissions on trade
- Fees for overnight carrying of a margin trade / short trade
- Need of a Direct Access Broker
- Services expected from the broker
- Currency conversion rates and fees, if traded in multiple currencies
- Type of investment account (e.g., 401k, IRA, RRSP, LIRA, TFSA etc.)
- Restrictions on transfer of the securities from another broker to this broker and vice-versa
- Stability, credit worthiness of the broker
