Buying a share in Apple Inc. isn’t like buying an actual apple. When purchasing a fruit you’re generally going to one of a limited number of stores and browsing the shelves. But with a share most of the time you’re buying it from a fellow investor (that might be a bank, a hedge fund, or Jenny from Iowa).
It can be hard for these buyers and sellers to pair up: it’s unlikely that you’ll know someone wanting to sell a stock at the exact same time you’re wanting to buy. That’s where brokers, the middlemen of finance, come in. They take your order to buy and find you a seller.
Do I need a broker? If you want to buy and sell stocks regularly (a.k.a. trade), then yes. Having a “broker” doesn’t mean there’s actually a suited guy running around on your behalf on the stock exchange floor though! These days, brokers are mostly digital platforms – systems that you can access from your phone or laptop to trade at your leisure. You can manage your portfolio online, submitting trades that your broker will execute electronically. And there are tons of different brokers out there, ranging from ultra-minimalist to complex tools that let you trade arcane financial products. The choice can be pretty overwhelming.
How do I pick the broker for me? Choosing a broker is a bit like dating: you’ll want to think about what you’re looking for, take your time, and hopefully end up with someone that you can stick with forever. But it’s hard at first to know what to look for, and that’s where this guide comes in. We’ll arm you with the tools to swipe right with confidence.
First up: time to imagine your dream broker…
To continue the dating metaphor, there’s a broker out there for everyone. Different brokers suit different investors – depending on your experience, trading goals, and even your aesthetic taste. Like all matchmaking, the goal is to find someone that meets your needs. As for what your needs are…
How experienced are you? Investing can be tricky, and some platforms give you an overwhelming amount of information and choices. If you’re brand-new to investing, you might want to find a platform targeted at beginners: one with a simple interface that can explain concepts and walk you through your first steps. You probably won’t want a broker with a high minimum deposit either – it’s best to start off with small sums of cash. If you’re more experienced, a minimum deposit might not bother you – instead, you might want tons of data at your fingertips so you can create charts to your heart’s content.
Do you want a personal touch? Most brokers these days are “discount” brokers: they only exist to fulfill your orders. These are the online platforms you’ve probably heard of (like ETRADE or Robinhood). You can log on to these sites and input trades yourself; it’s all fairly straightforward. But some people still prefer interacting with an actual human. Full-service brokers can provide this level of service and even buy and sell for you if you want (meaning much less work for you). The trade-off for using a full-service broker is higher fees – you need to decide if that’s worth it for you.
What kind of trading do you want to do? Different trading styles are suited to different fee structures (more on this later). If you’re planning on buying and holding the same stocks for ages, you’ll be less bothered by high transaction fees, for example. This goes beyond fees though: if you’re trading all the time, you’ll probably want a good mobile app so you can manage your portfolio on the go. You might also want access to a margin account, where you can borrow money to boost your bets – but not all platforms offer this.
What products do you want to trade? The most obvious place to start investing is buying stocks and funds in your local markets. But you might quickly find yourself wanting more – like overseas shares, foreign currencies, or even complex products like options and futures. Different platforms have access to different markets and products, so you should check that the platforms you’re considering have what you want. It’s probably sensible to pick a broker with as wide of a range of products as possible, in case you decide to explore new areas in the future.
What account type do you need? Some countries have tax-advantaged accounts (like ISAs or Roth IRAs), but not all brokers let you open these kinds of accounts. If you do want to take advantage of tax benefits, you need to find a broker that supports them.
That should give you an idea of the charms to be looking for in your broker. Now it’s time to discuss those less desirable traits, the ones that might really grate after the fourth or fifth date...
On every date there comes a time to pay the check. Brokers have to make money somehow, so will generally charge a variety of fees. There are too many to list, but these are the most common to look out for:
Account opening fees: These are particularly painful, because they mean you can’t try a platform out without spending anything. For first-time investors, it’s probably worth avoiding platforms with these fees until you have a clearer idea of your needs.
Monthly fees: Some platforms charge an ongoing maintenance fee (either monthly or annually). This is might be waived if your account is above a certain size or if you’re trading a certain amount per month, so think about how you’re going to be using the account before you sign up.
Trading fees: You’ll normally be charged a commission on each trade you make – sometimes that’s a percentage, other times it’s a flat fee. Different products might attract different commissions (for example, buying foreign stocks might cost more), so it’s worth investigating this fully. If you’re trading frequently, these fees can really add up.
Margin rates: If you do choose to borrow money to trade with, you’ll have to pay extra for the privilege. This isn’t something we’d advise anyone except the most experienced investors to try, though, as it’s immensely risky: you’re gambling with money you don’t actually have. Platforms also typically set a minimum value that your portfolio can fall to. If your trades move against you and your balance dips below that level you’ll get a “margin call”: a demand to deposit money to keep your account active. It’s scary stuff.
Withdrawal fees: If all goes well, you’ll make money with your broker and, at some point, you’ll want to take it out and spend it. But some brokers charge withdrawal fees, which can sting if you’re not expecting them. Price all of these fees into your investment decisions, because you may well have to pay them!
Some brokers have ultra-low fees in general: platforms like Robinhood brag about being zero-commission. In these cases, you should think about how the brokers are making money. Just as Google or Facebook give you lots of great services for free, but make money selling ads to target you, lots of brokers generate revenue by selling your orders to high-frequency trading firms. They can use this info to bet against your purchasing decisions, potentially meaning you’ll get worse prices for your trades. It’s a fairly common practice, but some brokers do it more than others: Robinhood reportedly gets almost half its revenue from selling order flow.
No one likes fees, but sometimes they can be worth paying up front for better customer service, a better trading experience, and maybe even better net returns. Remember, there’s no such thing as a free lunch.
Of course: no matter which broker you choose you’re going to give them access to your financial data and some of your cold, hard cash. You should be as certain as possible that they’re legitimate, and that it’s relatively safe to use them. Some things to think about:
Are they regulated? Most countries have some kind of regulation system for brokers – you’re going to want to make sure that they’re approved. And if you’re holding cash with your broker, you should check if that money is secure (is it covered by a government-backed guarantee, for example?).
Are their systems secure? Now that most trading is done over the internet, we’re all at risk of hackers and other nefarious types trying to steal our money. You should check that the broker you choose has good online security and generally seems to behave sensibly with your data (that they’re not sending out your password in emails, and that you need security questions to reset your account – the usual stuff). If anything rubs you up the wrong way, go with your gut and skip that broker.
Are they competent? Trading can be a high-stakes game: if a stock you own is tanking, for instance, you might want to sell it immediately to avoid racking up bigger losses. But if your broker locks you out of your account or goes offline, you might not be able to. If something major does go wrong, you’re also going to want to make sure that there’s someone who can help you – maybe even an actual human that you can speak over the phone.
What happens if the brokerage fails? Hopefully this won’t happen, but there’s always a risk that your broker goes bankrupt. If that does occur, you could be in a really tricky spot: most shares aren’t actually held in your name (rather, in your broker’s). To ensure you don’t get burnt in one of these disaster scenarios, look for some kind of contingency plan. In the US, for example, if your broker is a member of the SIPC you should be covered up to $500,000 in the event of a bankruptcy. And it’s worth having some kind of record of your portfolio, so that shares can be accurately re-assigned to you in such an event.
We’ve looked at the good and the bad of brokers: now it’s time to show you how to actually find one.
Now that you’ve got all this info, it’s time to strike out on your own. Search around for brokers in your area and you’ll see a few names that keep coming up. It’s probably a good idea to sign up for a few different platforms (as long as there’s no account opening fee) so you can see what their interfaces are like, explore the options available to you, and come to an informed decision about what you do and don’t like. Think of it as a series of first dates: getting to know potential partners without going all-in on one.
How can I test the waters first? Many platforms will let you do “paper trading”: letting you trade with fake money using their real interface and tracking real prices. It’s a great way to dip your toes into the waters of investing (it’s not a bad idea to play around with one of these for a while and see if you can make money before you start investing real cash). Paper trading is also a great way to get hands-on experience with different platforms to see which one suits you.
Ultimately, it’s worth going with your gut on these things: only you can know what kind of design, tools, and customer service fit your requirements. Try not to let your decisions be made by any one factor. Low fees aren’t the be-all and end-all, for example: sometimes it’s worth the trade-off of higher fees for better service.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.