As soon as you have done what is needed to test a trading system, you will find yourself ready to trade. This means you need to select a decent broker. Many markets make it a requirement that all traders perform trades through a broker. This means you have to select from two different types of brokers: the full-service broker and the discount broker.
At the key to the heart of finding a reliable broker means seeking one that suits you and your individual trading style.
Prior to selecting a broker, here are a few questions you should consider whether you are making a decision about trading online or full-service.
1. What are the real commission rates?
The commonly advertised rates for traditional brokers may range anywhere from a non-existent fee of $0 to upwards of $40 per trade for online services and up to $100 (or 1-2% of the size of the trade) if you have decided to access a full service system. That is why is it of paramount importance to clearly look at the company’s advertised rate and what it specifically applies to. In the great majority of instances there will be a significantly greater fee for brokerage services due to different trading instruments vs. those using a “real live” broker available and accessible through the phone. Sadly, one of the more common facts people discover is that the commonly advertised commission rate may not be directly applicable to the trades you make.
Also, if you’re dealing with a full-service firm, remember their commission rate is negotiable depending on how much business you are running through your account. Negotiate hard and get the best rate you can. Brokerage is a cost of doing business and as such you should always look to lower your expenses.
2. Are there any other extra fees?
Many companies, both online and full-service, charge extra ‘hidden’ fees, that can add significant costs to each trade. Charges to be aware of include those for transferring funds (both in and out of your account), insurance, administration charges, late payment penalties and more. You really need to look at the company’s fine print or e-mail for more details.
3. Can a member trade in multiple markets and, if this is the case, what will the commissions be?
As your trading progresses, you may decide to trade different markets. It’s easier to stick with the broker you have come to know and trust. Therefore, you really should plan ahead and choose a broker than can service your needs as you grow.
4. Will they pay you interest on the balance of uninvested cash in your account?
Some online and full-service brokers definitely do pay interest roughly in the 3-4% range.
5. Do you need to start with a large deposit?
Beware of high minimum balances required to open an account. While some companies have good rates, you may need $50,000 to start. It’s a lot of money to invest with a company you haven’t traded with before. Typically full-service firms will require more capital to start an account than a discount online service.
6. How reliable can the service be when it delivers services?
Speed and reliability of online trading is of utmost importance. I know of one client with a major online discount broker who watched as his account dropped by $10,000 because a system fault at his end meant he couldn’t log on for a whole morning! Which leads to another tip – ensure there is a backup way for you to place trades if needed.
With an online broker, always check to see that they offer Straight Through Processing which refers to trades placed in the market immediately after the are made. There are a select number of discount broker trades which have the ability to be placed manually.
On the flip side, a full-service broker will usually enter a trade as the request comes through over the phone.
7. Are any automatic features offered?
Always seek to examine the extras the company may put forth. Consider your options with these extras as they may end up complementing your trading style quite nicely. Conversely, if there are features that you will never use dismiss them since, well, you will never use them.
One excellent feature is that of automated stop losses. Such a feature will enable a trader to set a specified exit point with an automatically triggered function. Another aspect worth checking out is a contingent order which raises questions regarding whether or not one is allowed to place conditions that need to be met prior to an order being automatically placed? For example, if the share price breaks out from your specified buy point of $12, an automated buy trigger may be enacted.
The automated extras are commonly associated with online brokers, but it may be possible to find full-service brokers that make such offers as well.
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