Now that you’ve learned the basics of the stock market and different ways to analyze stock prices, you probably can’t wait to place your first trade. But before you go out into the wild, there is another important thing we need to cover. Stockbrokers!
Without them, you’re just a bundle of knowledge. Some will say that finding a good brokerage firm can significantly affect your success or failure as a trader. And even though you can always leave your online broker and find another one, it would be best to start with a good one to avoid getting into complicated situations. So, in this lesson, we will help you understand what a stockbroker does and how to choose the right broker for you.
Stockbrokers, also known as the middlemen, are regulated financial intermediaries that enable the buying and selling of securities such as shares, Exchange Traded Funds (ETFs), mutual funds, fixed income assets, etc. They either make or take liquidity, depending on the type of order they place. Without them, there would be no transactions.
Stockbrokers handle all transactions, including retail and institutional clients. A stockbroker could be a licensed agent or a financial firm that charges a fee for executing clients’ orders. A few centuries ago, you had to make a transaction through a stock broker as electronic trading was not very common.
These days, many stockbrokers also offer a trading platform and other services to help individual traders access the electronic stock market and place orders without the direct involvement of the stockbroker. The broker provides all the facilities, including the connection to liquidity providers, market dealers, and stock exchanges. And for that, stockbrokers charge a fee.
Now, if you’re new to the stock market and someone says the word ‘stockbroker’, the scene with Gordon Gecko in Wall Street (or some other famous stock trading movie)may come to mind.
And whilst that might have been accurate a couple of decades ago, nowadays, especially with the rise of the internet, it’s more accurate to think of stockbrokers’ online brokerages as computers rather than middle-aged men in colorful jackets shouting orders on the floor of a busy stock exchange. Today, everything is different, and a stockbroker simply connects you to the electronic stock market, where you can independently place orders.
Speaking of stock exchanges, there are sixteen major stock exchanges worldwide with a market capitalization of over US$1 trillion each as of 2022.
Can you guess what they call them? $1 Trillion Club. Yup, that’s right. #$1TrillionClub
Below is a list of the ten major stock exchanges worldwide as of 2022.
There are, of course, many, many more members of the stock exchange around the world. But more on that later on. Regardless, whether it is a computer or a person, and whether you are in the United Kingdom, India or Hawaii, the bottom line is that all traders need a stockbroker to invest and trade financial assets.
Your broker is so much more than a platform for placing trades. In fact, some may say that it is a crucial step in one’s trading career, ensuring they pick the right one.
As we mentioned, a stockbroker must be licensed by a regulatory body to buy and sell stocks on behalf of its clients. Now, that does not necessarily mean that the stock broker actually makes the transaction for the client (although it could be the case). Instead, they may provide a trading platform and connect you directly to the exchange. Stockbrokers also provide other tools and services to attract clients and increase revenues. After all, there’s massive competition in the industry, and every broker must provide the best terms and conditions to get as many clients as possible.
It is also worth mentioning that there are types of stockbrokers that serve as ‘brokers’ or market makers. While the traditional stockbroker connects investors to the exchange and acts as a middleman, a CFD broker essentially creates a derivative market and connects traders to buy and sell stocks and other assets in order to exchange the difference in the value of a particular asset. Typically, CFD brokers are considered online discount brokers as they charge a spread only, meaning there are no fixed fees.
What’s more, the role of a stockbroker can vary based on its business model. Full-service brokers – typically large investment banks like JP Morgan, Merrill Lynch, etc. – provide full client support, including customized support, investment advice, and portfolio management. In a sense, a full-service broker works for their clients, conducting market research and buying and selling securities.
There are thousands of brokers out there, so how can you make sure you choose the right one for you? What features are you supposed to look for?
Deposit options? Withdrawals? Fees? Leverage? Minimum deposit? Execution speed? Range of assets? Capital requirement?
I could go on and on – so many different factors to consider! And in all, it can get SUPER overwhelming, especially for new traders! But that’s where we step in! We understand that not everyone likes to do their research! That’s why we had our trading coaches with more than 25 years of experience combined to try out and analyze the biggest names in the stock brokerage game.
Yes, that’s right! We mean it when we say we want to make your life easier! So let’s take a closer look at the features we (and you should) consider.
Below is a quick checklist of things all traders (and/or new clients) should consider when choosing their stockbroker. Ensuring your broker covers such services is crucial when selecting the right one for you.
With that in mind, here are the top five things that you should fulfill your trading needs when choosing a stockbroker.
First and foremost, you must ensure that a broker offers a high level of security for your funds and investments. After all, you will not just hand over your hard-earned money to someone who claims they are legit, right? Therefore, ensuring they are registered with a financial industry regulatory authority is crucial. Further, ensure they hold your funds in a segregated account, and that broker is protected by the Securities Investor Protection Corporation (SIPC). This means that your fund is well protected if the brokerage firm fails to pay its liabilities.
Every time you buy or sell stock shares, you will have to pay for either the spread or a commission, so it is only natural to look for the most affordable rates. However, sometimes it’s better to sacrifice low transactions for a more reliable broker; it’s always worth it in the long run! Ask your prospect broker if they have professional body membership fees. What’s the charge for buying and selling stocks, and do they charge overnight interest rates fees?
That also depends on the type of trader you are. For example, transaction costs are not your most crucial factor if you are a long-term investor. However, if you plan to be an active trader that scalp or day trade, then fees may be a critical factor when choosing a broker, and you may want to select a discount broker.
Good stockbrokers will let you deposit funds and withdraw your earnings without any hassle. You should ensure that your broker’s withdrawal process is smooth and speedy. Some online brokers also offer more funding methods than others, so a good broker needs to provide a wide range of deposit and withdrawal methods.
It is critical that your broker fills you with the best possible price for your orders. Therefore, the speed at which your buy and sell orders get filled is super important. Make sure you check it online or with existing clients of the broker before you add funds to your account.
Stockbrokers ain’t perfect. So you must pick a broker you can quickly get in touch with if any issues arise. The competence of brokers when dealing with support issues is just as important as their performance in executing trades. There is nothing more frustrating than having technical issues and not being able to get an answer from your broker.
For that reason, some traders prefer to get involved in stock trading via newly qualified brokers or boutique successful stockbrokers rather than large investment banks and investment firms. In trading, customer support service is super important!
Choosing the right stockbroker will significantly impact your overall trading experience and is a decision that should not be taken lightly. Since you are just learning the basics of trading and financial markets, chances are you want to make your choice as easy as possible. At the end of the day, it all boils down to what type of trader you are, what market you want to focus on, and what features, tools, and services are most important to you.
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