Whether you are trading foreign currencies, futures or stocks, securing the services of a top-notch broker is an important first step. While brokerage firms are bound by extensive regulatory guidelines and required to preserve the integrity of the markets, not all brokers are created equal. Finding the one best suited to satisfy your unique trade-related needs is the name of the game.
As of year-end 2018, the Financial Industry Regulatory Authority (FINRA) listed 3,607 firms and 629,847 registered representatives as functioning security brokerage outlets. Whether existing as online discount brokers or full-service brick-and-mortar entities, this is a staggering number and one that often intimidates traders seeking viable alternatives.
However, building a list of strong candidates can become routine. Through conducting an extensive self-inventory and researching which firms best complement your resources and goals, it can become much easier to choose a rock-solid online stock broker.
Step #1: The Personal Inventory
Before ever opening a stock trading account, it's necessary to take a personal inventory. Through identifying your available resources, experience level, and trade-related objectives, it is possible to ascertain which type of broker is capable of catering to your specific needs.
Below are three primary components of the self-inventory:
- Resources: Quantifying the resources to be fully allocated to active trading is an important part of selecting a broker. The amount of capital, time, and individual strengths all factor into selecting the correct firm. If you are short on time, then a full-service firm may be a great fit in adopting a hands-off approach to the marketplace. Conversely, if you are a tech-savvy full-time trader, then an online discount brokerage may be a better fit.
- Experience: The length of one's trading career is often pivotal to the type of broker best suited for the job. Market newbies are often attracted by the availability of personal attention and educational materials. Veteran traders frequently prefer to trade in a self-directed capacity. Generally speaking, your experience level will greatly influence a service suite's suitability.
- Strategic Objectives: The primary goal of almost everyone in the market is to achieve profitability consistently. However, this is done via myriad strategic approaches, from intraday scalping to long-term investing. In essence, your ideal stock broker must complement the adopted trading methodology and/or investment objectives.
In many ways, the brokerage firm is the trader's partner in the marketplace. The broker provides market access, extends margin, and furnishes the trader with the support necessary to ensure efficient trading. Selecting a strong broker is a critical step in maximising the potential of available resources and achieving your trade-related objectives.
Step #2: Identifying A Stock Broker's Key Attributes
In the contemporary marketplace, there are two main types of brokers: full-service and discount. Full-service brokers specialise in more traditional financial services, while discount brokers are primarily found online and provide an array of self-directed options. Your level of expertise and experience will greatly influence which type of broker is most suitable.
Regardless of classification, stock brokers furnish clients with many services integral to the equities trade. The following are six features common to the top online brokerage firms:
- Affordable Fees: As technology has evolved, the cost of trading stocks has decreased exponentially. A good online broker should offer low commissions on stocks, options, mutual funds and exchange-traded funds (ETFs). While fees and commissions do vary, the industry standard for online brokers is below US$10 per trade, a fraction of what it was in the mid to late-20th century.
- Availability Of Margin: In contrast to futures and forex, being able to trade stocks on margin is not necessarily a foregone conclusion. An account must be approved for margin trading and it's subject to formal regulations. According to the U.S. Securities and Exchange Commission (SEC), "You may borrow up to 50% of the purchase price of securities that can be purchased on margin." In addition, brokers are able to place their own restrictions on margin trading including extensive account deposits and limited offerings.
- Customer Support: Any online broker deemed a potential candidate for your business needs to offer a dedicated team for any trade-related issues that may arise. Access to a trade desk during market hours and technical support are particularly vital for the smooth execution of trading operations.
- Platform Options: Multiple platform options are ideal for traders who desire more than one form of market access. Web, desktop, and mobile applications are commonly offered to clients by online stock brokers.
- Market Research and Education: A robust educational suite can be a valuable resource for trader development. Many traders will use webinars, live tutorials, and expert blog content as their tools for learning.
- Investment Management: Professional money management services are one area where many online stock brokers specialise. From designing portfolios to extending third-party investment advice, firms frequently incorporate these features into a comprehensive approach to client service.
Upon completing your personal inventory and identifying which brokerage attributes are most important, choosing an ideal firm becomes relatively straightforward. The best online stock broker for your situation is one that provides a robust collection of desirable services at an affordable price.
Step #3: Making Sure The Firm Is In Good Standing
Aside from making sure that an online stock broker is able to satisfy your trade-related needs, it is important you're certain that the firm is in good standing. This will require three exercises in due diligence:
- Check with local regulatory authorities to ensure that licensing requirements are satisfied and up-to-date. As an example, the European Securities and Markets Authority (ESMA) oversees the markets in the eurozone.
- Researching the firm's historical track record of judgements and dispute filings is a good way of establishing reliability.
- Examining the financial solvency of the brokerage house in question is a necessity. Attributes such as number of years in business and industry reputation can provide clues into a firm's financial standing.
Choosing a competent and reputable broker is a critical aspect of trading stocks in as safe a manner as possible. Through conducting a comprehensive self-inventory, evaluating the attributes of available alternatives, and establishing that candidates are in good standing, you'll be more capable of selecting the best online stock broker for your situation.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…