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How to Choose a Stockbroker

How to Choose a Stockbroker

Beginner

30th November 2019
Updated: 9th September 2020

The stock market involves many twists and turns, and can become complex very quickly. In addition to stock exchanges, stockbrokers play a significant role. Traders depend on brokers to make their investing life both possible and bearable. Read on to understand what exactly a brokerage company is and what it does.

Stockbrokers Explained

Investors can sometimes find the stock market overwhelming. The stock market consists of a vast ecosystem of people, computers, and organizations that generates tons of information at any given time. For instance, the New York Stock Exchange lists approximately 3,000 companies from across the globe. Millions of investors follow the NYSE to track the performance of various companies whose shares they own. On a daily basis, assets worth trillions of dollars change hands on the NYSE alone. This speaks to the significance and complexity of the operation of the global stock market.

Given the vastness of the stock market, stock brokers (otherwise known as just brokers) exist to simplify the trading process for investors. A brokerage company is an entity that helps investors buy and sell stocks over an exchange. They link investors interested in buying stocks to those interested in selling them. Once a transaction between the seller and the buyer is complete, the brokerage earns a piece of the value of the transaction as a commission.

Brokerage firms all have their little differences. There are those that offer services through an app or on the Internet, while others still do a lot of their business in person. However, the work of brokerages all across the globe is similar, regardless of how they achieve their objectives. These firms employ stockbrokers who handle assets, while researching the stock market to find the best deals for their clients.

Different Types of Stockbrokers

There are three major types of brokers:

Full-service brokers

This type of broker provides services to investors in the most traditional sense. Clients of these companies get to experience the full service that a brokerage company has to offer. These range from executing trades for clients to tax planning, investment advising, estate planning, and research services. These firms have dedicated stockbrokers who handle every client in person. For such conveniences, these brokers charge higher fees compared to the competition. The significance of signing up with a full-service brokerage company is that you might avoid paying unnecessary tax, among other pitfalls. Depending on how much you invest, it may be worthwhile!

Discount brokers

Discount stockbrokers offer stripped-down services compared to their full-service counterparts. Usually these brokers will not go beyond executing trades for the investor. In addition, the clients do not get personalized attention and hence no additional services such as research and tax advice. The upside of this relationship is that you get to pay lower brokerage fees. Given the stripped-down approach of discount brokers, most of them do not have a physical presence, instead interacting with their clients via the Internet and telephone. Investors who have small amounts of investment capital may find it convenient to open trading accounts with discount stockbrokers.

Robo advisors

As the name suggests, these brokerages are mostly non-human. This type of brokerage provides automated advisory and trade execution services entirely carried out by algorithms. But don’t let that put you off, since robo advisors can deliver solid returns. The beauty of robo advisors is that they demand little commission on transactions. The main drawback is that you don’t really have much choice in what happens with your money, as artificial intelligence decides nearly everything.

Selecting the right broker

Once you are clear on what a broker is and the nature of a broker’s role, you need to choose the right one for your needs. The following points are important to look into when choosing your stockbroker:

Security

The most important consideration is the security of your money. The stock market sees gigantic sums of money exchanged, which can make it tempting for fraudsters. As part of your due diligence, look into whether the broker you select is legitimate. Fortunately this is an easy task to accomplish nowadays, as all brokers must operate with a regulatory license. Make sure you look into where the broker holds its license and ensure that it can legally accept customers from your country.

Commissions

All brokers take commissions. Different rates of commission apply to different assets. For example, individual stocks attract commissions per trade, but some exchange-traded funds (ETFs) are commission-free. The most critical point to note is that brokers vary on commission. In addition, some brokers charge additional fees such as per-contract fees on top of commissions when trading options. Therefore, ensure that you look into each broker’s fees so you fully understand how that will affect you when investing.

Deposit and withdrawal process

If you are going to use an online broker, find out the process for deposits and withdrawals and ascertain the ease of access to your funds. Most brokers have a fast deposit and withdrawal process, but some will have certain terms you need to abide by, which can cause restrictions. Also be sure to look into whether you will be charged for simply withdrawing your money; this is a known part of the small print where fees are hidden!

Execution speed

Securities trading is thrilling in a fast-moving market. While such a market has huge profit potential, the effect might be the opposite if your broker cannot fill your order in good time. A fast-executing broker is always the best choice. Make sure to look at reviews online and test brokers’ reaction time with some small trades before investing substantially.

By Harry Atkins
Harry joined us in 2019 to lead our Editorial Team. Drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience in the finance sector encompasses work for high street and investment banks, insurance companies and trading platforms.
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