Basic Trading Concepts Defined
One of the biggest challenges facing traders is the choice of a broker. There is a wide variety and many various kinds of services—so this is not a simple decision. The choice you make will influence your profits as well as the success you have in your career.
After perusing the earlier articles in this section, you should better understand the actual role of a broker and the different types that you have to choose from. However, it is important to check out all of the brokers that you are interested in through the Broker reviews that Tradingfo offers.
One of the most effective ways to give a trading platform and a broker's services a dry run is to set up a demo account with that broker. These accounts are free, and they show you the commission structure, the practices of the broker, and the services available.
The majority of brokers even offer fictitious money in demo accounts to give you some practice. These accounts pose you no risk, and the process is just the same as when you are working with a real account.
This article shows you the different elements to consider when selecting a broker for your investments.
Is the broker licensed by such relevant oversight organizations as the SEC, FSA or CNMV?. This will ensure that your broker does not commit fraudulent transactions and stays within the rules.
Check if the broker is regulated under financial authorities, such as the FSA or FCA.
Ask if the broker you are considering stores your money in an account separate from the main company account. This is the best practice, and it is what most reputable brokers do. This way, if the broker ends up bankrupt or has to close his doors, your trading money is safe in its own account.
Check if the broker holds your funds in a segregated account.
Examine the structure of costs with your broker. Common costs include commission costs, commission structure, fees for inactivity and the overnight rate of interest. Commission costs will slowly bring your account downward. All brokers have commission structures, so make sure that yours are as reasonable as possible.
Costs and commissions vary from one broker to the next. Check which commission structure the broker uses.
Some brokers offer margin accounts, while others only offer cash accounts. Margin accounts allow you to borrow with an investment, so find out the amount of leverage your potential broker offers, and see if his offering matches what you need for your investments.
Check what type of leverage and margin the broker offers.
Spread – Some brokers offer a fixed spread, while others offer a variable one. Find out the overall spreads for the products that you are interested in. The majority of brokers market the lowest spreads they are able to offer. The lower the spread, the higher your chance of profiting from a particular trade.
Find out the overall spreads for the products that you are interested in.
Some brokers take the opposite their client's position, while others put a client trade right on the exchange. Find out which one your broker does.
Find out which type of broker it is—such as MM, STP or ECN—to find out what business model the broker uses.
Requirements for Deposit
Each broker has a different rule for this, so you'll want to know what your potential broker requires. Some require $20,000, while others don't require any minimums at all. You may find that commission structure is more costly with a lower minimum, so make sure to keep both of those factors in mind.
Find out what the required minimum deposit is for the broker to be in line with your investment needs.
Will the broker credit your account when companies release their dividends? When you are looking at stocks, this is an important question. The majority of brokers do offer dividend payout, and you are entitled to dividends in some cases, even if you don't actually own physical stock. Some traders look at payouts when they’re putting their whole strategies together, so make sure that you find out about this.
Find out if the broker pays dividends when you are holding stocks.
Withdrawals and Deposits
If you’re facing a margin call, you will need to know how long it will take for a deposit to register in your account. Also, you might need money from your brokerage account, so find out the withdrawal process as well.
Find out how much time deposits and withdrawals take.
You need a broker who responds quickly to your needs. This is a good reason to set up a demo account, because it gives you a chance to use the entire organization. Review the contact information for the customer service desk, as well as the hours when you can call in. If you find that your Internet goes down when you are sitting in a big position, you will need it resolved quickly. You can look at this by calling your broker or sending a quick email.
Contact the broker to test their customer service practices.
Types of Brokers
Retail investors have access to four different types of brokers.
Full-service brokers – These are brokerage firms that give you a whole suite of financial services, including market analysis, trading tools and investment advice. They help traders find profitable opportunities in the market. These are the most expensive brokers, but you also get the most in terms of services.
Full-service brokers offer complete financial packages. However, this is the most expensive type of broker.
Discount Service Brokers – These brokers also manage client trades, but they offer fewer services than a discount service broker does. This type of broker can save you 92% in comparison to a full-service broker.
Deep-discount brokers also manage client trades but offer fewer services and are a cheaper alternative than full-service and discount service brokers.
Online Discount Broker – This sort of broker allows you to handle all of your services online, giving you complete control over your positions.
Online discount brokers give you complete control over your investments and are the least expensive option for your investments.
Types of Accounts
As stated previously, you can have either a cash account or a margin account.
Cash account – Some brokers will require cash accounts in order for their customers to trade. They require the customer to pay—in full and on the established day—the full amount of the transaction costs. These accounts are usually required for Full-Service Brokers and Discount Service Brokers.
Discount Service Brokers – This is the most active type of account, allowing clients to borrow money from the broker to gain leverage on their trades or transactions. You will usually find Margin accounts in Online Discount Brokers. Trading on margin is risky as it allows you to trade expensive products with high amounts of leverage.
This overview gives you a look at the various criteria you should have in mind when selecting a broker. The choices you make will influence your ability to make profits off your trades. The more experience you have with trading, the less assistance you are likely to need from your broker. Make sure that you give your investments the very best chance by choosing a combination of service, commission and security.
Reference: Jack Maverick
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