How to Choose the Right Broker for Your Trading Needs - dummies

How to Choose the Right Broker for Your Trading Needs

By Michael Griffis, Lita Epstein

Before beginning a search for the right broker, you must first decide what type of trader you want to be and what services you need. If you want to be a position trader, or one who trades infrequently, your best bet is either a full-service or a discount broker. Making the choice between full-service and discount brokers depends upon how independently you want to operate as a trader.

If you want advice on your stock-investing plans, you need to seek out a full-service broker, but this expensive option is not necessarily recommended. Before risking your money on trading, however, you need to be comfortable enough with the language and mechanics of trading and how to conduct your own research. If you don’t need the services of a direct-access broker, your best bet is to select a discount broker.

Consider more than price

Your choice of brokers should be based on more than who offers you the cheapest price. Although price definitely is a factor in your selection of broker, the most important factors are the services that your broker offers and how effective and efficient the broker is in carrying out promised services. Look for brokers that offer smart order routing capabilities, but avoid the ones that accept payment for order flow.

You may find a brokerage firm that provides all the bells and whistles at the cheapest price, but if its systems break down at a critical trading moment and you’re not able to implement your trades when you want to, not being able to rely on them can result in huge losses. Look for brokers that allow you to test-drive a demo version of order entry systems.

Also, if you want to trade using a mobile device, be sure your broker offers one that is dependable.

Do your research

If you expect to become an active and successful trader and want full access so you can trade electronically through the exchanges, you more than likely need to research direct-access brokers. If, however, you believe that your volume of trades per month will be lower than 50, you may want to consider a discount broker that offers access to ECNs.

Basically, your choice of brokers comes down to the types of services and accounts you need and which broker offers the best mix for what you want to do and pay.

Your first step is to make lists of your financial objectives, the types of trading you want to do, and the services you know you’re going to need. After committing those factors to memory, talk with other traders you know and be sure to find out what their experiences have been with various brokers.

You can also research and compare ratings of brokers on the Internet. Try these websites:

  • SmartMoney: This site also conducts a yearly survey that can give you an excellent overview of broker performance. The survey lists rankings for basic and premium discount brokers and full-service brokers.

  • Barron’s: The website of the weekly financial magazine does an excellent annual evaluation of online brokers and direct-access brokers, usually in March. A subscription is required.

  • Active Trader and Stocks and Commodities: These magazines also periodically review brokers and trading platforms. Subscriptions are required.

After narrowing down your choices, check out the disciplinary histories of the brokerage firms you’re considering. You can easily do that by calling a toll-free hotline operated by the Financial Industry Regulatory Authority (FINRA) at 800-289-9999, or checking its website to find out what disciplinary actions (if any) have been taken by securities regulators or criminal authorities.

You also need to call your state regulator to be sure the specific broker you’re thinking about working with is licensed to do business in your state. This information can be crucial. If you work with an unlicensed broker who goes out of business, you may not have any way of recovering any lost funds even if an arbitrator or court rules in your favor.

How you’ll be paying

After conducting your initial research into brokerage firms and narrowing down your choices, be sure you understand how the brokerage firms are paid by

  • Reviewing each firm’s fee and commission schedule. The schedules should include the fees or charges you’re required to pay when opening the account and what you pay to maintain and close the account.

  • Finding out how your broker is compensated if you’re planning to work with a human being rather than trade online. Many brokers receive higher compensation when they sell their firm’s own products, so they may try to steer you toward them rather than another product that may be a better match for your trading objectives. Rarely are brokerage products good trading vehicles.

One other level of protection that you need to check on is the broker’s membership in the Securities Investor Protection Corporation (SIPC). Although SIPC membership won’t insure you against losses caused by market declines, the SIPC does give you some protection if your brokerage firm faces insolvency.