Picking a broker is a very important task to do. You’re basically handing another person your hard-earned money, and you want to protect that money not only from market losses but also from incompetent or fraudulent brokers.
Types of Brokers
In general, there are two types of brokers. There are those who deal directly with their clients, and then there are the broker-resellers who serve as middlemen between a client and a larger broker.
Then there are also full-service brokers and discount brokers. Full-service brokers, as the name implies, regularly provide individual advice and recommendations. Of course, these services aren’t cheap. That’s because a full-service broker does much of the work for the investor.
On the other hand, discount brokers usually let you make your own decisions, but many of them also offer the option to ask a broker for advice on a particular trade for free.
Online discount brokers these days usually offer a vast array of tools for investors of all levels. And when you do the legwork yourself, it’s easier to learn a whole lot more.
Charges and Expenses
Trade execution fees are also important to consider, as well as the other brokerage fees. You must make every penny count, so it is important to make the most of your capital.
Check the minimums. Most brokers require a minimum balance for setting up an account. And online brokers usually have the lowest minimum requirements, which can range between $500 and $1000.
Check the margin accounts. For new investors, opening a margin account right off the bat may not be a very good plan. However, it is something worth considering. Margin accounts usually require higher minimum balance requirements when compared to standard brokerage accounts.
Check the withdrawal fees. There are brokers that charge fees when the trader makes a withdrawal. Then there are also those who don’t permit a withdrawal if such move will drop your balance below their required minimum.
There are brokers that have complicated fee structures that make it difficult for investors to know what they are paying. You can find this commonly among broker-resellers that use aspects of their structures to entice clients.
If you think a broker’s fee structure is very unusual, it is very important to make sure that the broker legitimate and that it cares about your best interest. The fee structure should also complement your investing style.
If the rates in the fee structure appears too good to be true, check the fine print in the account agreement as well as the fee summaries. There could be some hidden fees somewhere in there.
The way you choose your broker can be impacted by the investing style you’re using. Do you treat yourself as a short-term trader or a buy-and-hold investor?
If you think yourself more of a trader, you may want to look for a broker that has very low execution fees. That’s because accumulated or huge trading fees could chip a huge chunk away from your trading capital.
At the same time, remember that active trading takes a lot of experience. If you’re inexperienced as well as trading too frequently, you may expect negative returns.