How to Choose a Right Stock Broker

Checklist for selecting the right stock broker

Are you searching for a stock broker? With the help of internet coupled with the words of mouth, it is no longer difficult to come across stock brokers nowadays. However, the problem is not in locating a stock broker. You need to choose the one that is right for you. When it comes to investment matters, you can’t afford to leave anything to chance. Of course, you can be fortunate enough that the first stock broker you meethis will be an exception. Even, if you consider him a perfect fit for you, you should be able to have a checklist which can guide you in the choice of a right stock broker. Without a checklist, your choice may be influenced by your emotion or other external factors. For example, if your friend refers a stock broker to you, you may be tempted to stick to the person just because you want to please your friend. There is no sentiment in investment. After all, it is your money that is involved. It even goes beyond money, it may have to do with your future. Therefore, it is better to choose your stock broker carefully. Choosing a right stock broker goes beyond whether the person is good or not. You need to consider many factors. These factors are discussed below and you can use them as your checklist for selecting a right stock broker.

  • Minimum Investment: Stockbroking firms are in different sizes but no matter your level of investment, you will find one that is right for you. Big stockbroking firms may not be willing to accept clients that can’t meet their minimum required investment. Don’t be surprised that some stockbroking firms may say that the minimum required amount you can pay to open your account is $10,000. When you come across such stockbrokinen you come across such stockbroking firms, you don’t need to waste your time if you don’t have such amount. If you search further, you will definitely find the one that will suit you. The same way we have big stockbroking firms, there are also small stockbroking firms that will allow you to open account with zero deposit. This may not have anything to do with the competence or reliability of such firms. It is just their customers’ acquisition strategy. However, you may not have access to their research reports or analysis until you make the initial payment. You are not considered a client until you make a commitment by way of making payment to activate your account.
  • Fees: Stock brokers charge fee in different ways. Some may charge a flat fee per transaction while some may charge commission as a percentage of the transaction involved. Besides this fee, other fees may also apply such as annual account maintenance fee and inactivity fee especially if you are using online trading platform. Also, if you need to transfer your stocks to another stockbroker in the future, you should have a clue of what to expect. I know that some stockbroking firm charge account transfer fee. Don’t be carried away by some adverts promising you that they don’t charge trade commission. You need to read and understand the terms and conditions attached to that type of offer. You may be required to trade a minimum number of stocks before you can be entitled to free trade commission. When you compare the fee, you will be able to determine whether a stock broker is right for you or not. If you want to be an active investor which may require that you buy and sell stocks on a regular basis, you need to consider the fees your stock broker charges both on purchase and sales of stocks. If the addition of the two fees is high, it may erode any gain you realise on your stocks.

Read Also: How to Invest for Beginners in Order to Make Money

  • Research: If you want to make money in stock market, you need access to information. Is the stockbroking firm having a research department? A stockbroking firm that provides special reports to its clients will be a good one to choose. I am not talking about the kind of general research work which anybody can access on websites. It should be research work that is exclusively meant for their clients. Such reports will provide you with insights on the stock market and up to date market analysis that can help you position yourself strategically. In addition to daily stock price list, you should have access to equity comments and recommendations.
  • Reputation: You need a reputable stock broker to work with. Reputation in this sense may not have anything to do with the size of the firm. I am talking about trust. Your stock broker should be trustworthy. He should be the one you can trust with money. Someone told me something years ago and I cannot forget it. He said that some people are honest until they have access to money”. He was talking out of experience. That is just the truth about some people. That is why it is advisable to choose a stock broker you know. However, if you don’t know the person before, it might be good to ask for references.
  • Clientele base: Who are the clients of the stockbroking firm? What is the size of the clients? How long has the firm been in existence? You can use the age of the firm to measure its growth in term of customer’s acquisition. If the firm is relatively new, it may not have many clients at present. But you need to ask yourself if you will be comfortable being one of the pioneer clients. This has its pros and cons. Being a pioneer client, you may enjoy personal service and unparalleled customer supports as the firm will like to win the hearts of the new customers in order to retain them. The clients can also refer other clients if satisfied. The disadvantage is that, you may not be able to have any feedbacks and comments about the services of the firm from existing clients.
  • Other products: Are you interested only in stock trading? If your interest is only in stocks, then, you may not need to bother whether the firm offers other products or not. It is possible that you may not have interest in other products other than stocks now. In the nearest future, you may want to extend your portfolio to other product such as Forex, mutual funds, ETFs, options and futures. If the firm does not offer these products, it means you may start looking for another stock broker. Nevertheless, you may ask the stock broker if he intends to extend his services to these other products in the future. If the answer is in the affirmative, you can actually grow with the firm.
  • Online trading platform and investors’ tools: This is very crucial if you are looking for online stockbroking firm. You need a robust trading platform that can allow you not just to trade. You should be able to have an overview of your portfolio from the dashboard as well as the market environment. A trading platform that is both desktop and web based may be ideal. Most online trading platforms are now accessible on IPhone, Apple Watch and Android. You should ensure that you can access the trading platform of your stockbroking firm on your devices. You should also consider the availability of investor’s tools such as charts, real time analytics, events, alerts and watch lists. For online platform, some online brokerage firms allow you to open a demo account. This will allow you to test drive your stock investing skill by using free money as if you are trading with your own money in a real time. Whatever gain or loss you make at this point does not count. It is just to provide a platform for you so that you can have a practical demonstration of how stock market operates. You can start trading in real term after you have built enough confidence.
  • Customer Service: The importance of good customer service cannot be over emphasized when deciding on which stock broker to choose. How quick does the firm response to customers? At times, you will need to quickly pass information across to your stock broker so that he can quickly execute your orders. Will he be available at all times or he is the type that will have his phones switched off when you need him most? What are the means of communication? Having more than one means of communicating with your stock broker will be fine. This can be by phones, emails or live chats.
  • Dividends: You need a stock broker that can help you follow up on your dividends. It doesn’t matter if you provide your banking details so that the company where you invest, you realise that your dividend may be delayed unusually especially if you hold a large number of shares. You may not even have time to know whether dividend has been declared or not. With the help of a good stock broker, you will be able to track all your dividends and ensure that non is lost or returned as unclaimed dividend. Your stock broker can even help you reinvest your dividend.
  • Regulatory issue: In every country, stockbroking is usually regulated by the Stockbroking regulatory authority. You need to be sure that the stockbroking firm you want to choose is licensed to operate in the stock market. Also, the stock broker as a person must have undergone and passed the professional examinations that qualifies him to practise. There have been incidences where stockbrokers’ licenses are withdrawn due to sharp practices and misconducts. You need to be sure that your stockbroker has not been disqualified or sanctioned. Also, stockbroking firms are expected to meet certain standards. These standards vary from country to country. You should ensure that the firm is in full compliance with the set rules and regulations.
  • Personal qualities: The personal qualities of your stock broker is very important. There is a saying that you can’t walk with a giant and remain a dwarf. If somebody is promising you that you will help you achieve a particular benchmark of returns on your investment, ask him if he is a stocks investor or just a trader. It will surprise you to know that some stock brokers are just career professionals. They don’t invest their own money in stocks.You need a stock broker who is also an investor himself. Other personal qualities you should look forward to see in your choice stock broker include the following:
    • Objectivity: You need a stockbroker that is very objective. Remember that they live on commission. If a stock broker is not objective, it may be difficult to rely on his recommendations. Most of the times, you find such stockbroker pursuing his own interest to the detriments of his client. For example, one client way be finding it difficult to sell his stocks at a particular price. If you have a stock broker who is not objective, he may try to convince you that you should buy the stocks. Meanwhile, it may not necessarily mean that such stocks suit your financial goals or your risk tolerance. He is only pushing you to buy the stock so that he can make commission both from you and the other selling party. Although the type of practice is frown at by the Securities and Exchange Commission, it can be done without any suspicion. It is when such practice is discovered and reported to the Securities and Exchange Commission that such stock broker can be sanctioned. But if you are a beginner investor, you may not even know that such practice exists.
    • Honesty: Honesty is the best policy they say. Remember the statement by senior colleague once told me that many people are honest because they don’t have access to money. It may be difficult to vouch about ones character when he has not been tested with money. The testimonies you garner from people both from formal and informal settings about a stock broker may help you to determine if he is going to be honest or not. Do you know why you need a honest stock broker? A licensed stock broker may not dupe you of your money because there are laws and regulations guiding their operations which he needs to comply with. But if your stock broker is not honest, he may be using your money to trade and be claiming that the stocks you want to buy is not available. If you are an active trader, there will be some times when you will see hot stocks that you will need to quickly buy when the prices are gaining momentum on a daily basis. You may just want to buy and hold just for two weeks and then take position. In such type of stocks deals, you make your profit when you buy. That is, if you are able to enter the market before the stock price goes up, you will be able to make at least moderate gain when you sell. Let me explain this with this example. Let assume that you discover a penny stock which is a very hot pick whose price grows by 5% every day. The table below represents the stock price.
      Day  Opening Price ($) %Change  Closing Price ($)
      1                         2.00 0.05                      2.10
      2                         2.10 0.05                      2.21
      3                         2.21 0.05                      2.32
      4                         2.32 0.05                      2.43
      5                         2.43 0.05                      2.55
      6                         2.55 0.05                      2.68
      7                         2.68 0.05                      2.81
      8                         2.81 0.05                      2.95
      9                         2.95 0.05                      3.10
      10                         3.10 0.05                      3.26

      It will be assumed that you instruct your stock broker to help you buy the penny stock when the price is at $2. If he is honest enough to buy at $2.00 while you later sell at $3.26. That will be a gain of 63% within 2 weeks. On the other hand, if the stock broker is not honest with you, he may claim that the stocks is not available. Because of your incessant calls, he may now but at $2.43. If you sell at $3.26, your gain will be 34.16%. Can you see the difference? That is just a simple illustration without taking into consideration any transaction fee. This is not to say that if your stock broker is not honest if he tells you that a particular stock is not available to buy. Hot stocks may actually be difficult to find as the competition is always very high. This is understandable. But it won’t be nice if you are losing money to a dishonest person.

    • Accountability: If you have a stock broker who is accountable, you can go and sleep because such person will handle your money the same way he will handle his own. Personally, I will not like to be the one doing his job for him otherwise there won’t be any need for his service. You don’t need to start calling your stockbroker before he deems it fit to send you your contract note or monthly statement. You need two monthly statements. The first one showing your transactions with your stock broker while the second should show the list and numbers of stocks you hold. It is possible that you can access these statement online. 
    • Positive attitude to learning: We live in a fast changing environment. No matter how brilliant you are, you will soon become outdated if you refuse to update your knowledge. The same thing apply to your stock broker. There are many things to learn these days. A good stock broker should not just limit himself to stock or equity trading. He should know how to trade other derivatives. The saying that “if you know how to trade stocks, you qualify to be called a stockbroker” does not hold any longer. If all your stock broker knows is how to buy and sell stocks, that person may not be right for you. How will he be able to advise you on diversification. The truth is that, he can’t offer what he does not have. A good stock broker should be a life-long learner.

Read Also: Investing in Stocks: Beginner’s Guide on How to buy Stocks

Online Stock Trading

In this new era, technology is changing the way businesses are being conducted across the globe. Therefore, online stock brokerage seems to be gaining more ground. If you have good knowledge about stocks investing, you can more or less act as your own stock broker. With online stock trading platform, you can buy and sell stocks at will on your own. You only need an online stock brokerage firm that can provide you a platform where you can execute your own order. But if you are not skilled enough, it is still better that you go through the traditional stock broker so that he can manage your portfolio for you.

Advantages of online stock brokerage

  • Trade on-the-go: You don’t need to visit any stockbroking firm to submit orders neither does your stockbroker need to get to the floor of the stock market to carry out your orders. You or your stockbroker can initiate and complete stock transactions on the go now. Whether you are in your office, at home or on the go, you can access the online trading platform on your desktops, laptops. IPhone, Apple Watch and Android.
  • Instant trade confirmation: You don’t need to wait for your stock broker to send you contract form before you can confirm that your order has been executed. With online trading platform, you receive instant trade confirmation immediately the transaction is completed.
  • Fund your account conveniently: You can fund your account conveniently through different payment medium. The good thing is that you can start using the money to trade almost immediately. So, you never miss out of opportunity due to the lack of sufficient funds in your account.
  • Convenience and control over investment trading activities: Trading activities can be conducted round the clock. Even, if the market is closed, you can submit your orders at your own convenient time. The order will be executed when the market resumes if the criteria you set for the orders are met. For instance, you can submit an order to buy a certain number of a specific stock at a particular price. If the stock is available when the price gets to the amount you fixed, the order will be executed automatically.

Read Also: When is the right time to buy stocks?

  • Direct market access and full order management capabilities: When you use online stock trading platform, it is as good as when you are at the floor of the stock exchange. You have access to stock price real time. You can do what you would have done if you were at the floor of the Exchange. Before now, if you were unable to go to the stock exchange floor, you will not be able to buy or sell stocks. But now, whether you are at your home or far away in an overseas country enjoying your vacation, you can still trade effectively.
  • Access to robust research materials including stock recommendations. Online trading platform is full of useful tools and research materials which can help you make investment decisions. You can see the charts showing the trends of share price. This is made flexible in such a way that you can decide to flex the chart to show you trends on hourly, daily, weekly, monthly and yearly basis. Also, you will have access to latest news relating to the stocks in your whitelist and information about stock market and the economy at large.
  • Fast and reliable execution: Is there anything that can be faster than just a click of button? Just with a click, your order is carried out as long the trading is on-going. You don’t need to start calling your stock broker before your order can be executed. This is very crucial if you are an active trader.
  • User-friendly trading platform: Most of the online trading platforms are very user friendly. If you can use a computer, you will be able to use them without any need for training. Besides, you can open a demo account where you can practise how to use the platform effectively.
  • Competitive pricing: Apart from the fact that you have access to live stock price, you are free to set the price at which you want to buy or sell a particular stock. This means that you don’t buy if the price is unfavourable to you.
  • News and trade sensitive alerts: Share price can fluctuate at any time. It can either go up or come down. One of the reasons for fluctuation in stock prices is the news released per time. With online trading platform, you can be sure that you will receive news that pertain the stocks in your portfolio. If this news is negative, you can quickly offload the affected shares. This will help you to cut your losses very quickly.
  • International stock trading: Some online stock brokerage firms offer foreign stocks on their platform. So, if stock market is not performing in a particular country or continent, you can decide to switch your stock trading into another country or region where stocks seem to perform better. Also, you have access to wider products. If one product is not performing, you can switch to another. Such products include forex, ETFs, options, futures and mutual funds.

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