How to choose a stock broker:

Choosing a stock broker

Choosing a stock broker can be more complicated than it sounds. The right broker can open up investment opportunities for you, but the wrong one can limit your options and drive up your costs.

In this article, we will look at several tips to keep in mind when choosing a stock broker.

1. Figure out which markets you want to invest in

If you're planning on investing only in stocks listed on your local stock market, you will likely be able to choose from many brokers. If you want to invest in certain foreign markets, your options may be more limited.

You can have accounts with multiple stock brokers - many investors do this. But it's often convenient to try and get just one or two full accounts covering most of your investments, rather than having to open a new account every time you want to buy a stock listed in a different country.

2. Pay close attention to brokerage fees

Many investors blindly focus on brokerage commissions. But stock brokers take a wide range of fees. Some promise low rates, but recoup it all through high conversion fees or pricey account management fees. Try to get an idea of ??what it will cost you to manage your portfolio over a year, rather than just the price per trade.

3. Figure out what you want from your stock broker

Stock brokers fall into two categories:

Pure or "discount" brokers simply execute your trading orders, either online or over the phone.

Full-service brokers will discuss your portfolio and investment ideas with you. You make the final decision, but they will give you advice. Some of these brokers also offer discretionary services to clients with large portfolios, where they manage your money for you.

Advisory services obviously cost more, but some investors appreciate the additional support and advice their broker can offer. To get the most out of a stock broker, you need to find a broker with whom you have a good relationship and whom you can trust.

In this context, you also need to think about how you plan to invest. Highly active traders will need high-speed online access and low commissions, while long-term investors will be less concerned with costs.

That being said, while services for long-term investors will never be right for active traders, the opposite is not always true. There are many companies that market themselves to active traders, but will still be an ideal choice for those who don't trade much. So don't be put off by advertising.

4. Understand how your broker operates

This point is a bit more technical, but it can be helpful in choosing the best broker.

Stock brokers don't all act the same in different markets, especially when it comes to international securities. Some offer direct market access (DMA), which means your order is directly sent to the relevant exchange.

Usually, though, they go through a market maker, which is a company that is always ready to buy and sell a stock and constantly offers a buy/sell price. Market makers only trade with institutions and brokers, not directly with traders.

Depending on how your broker is organised, they may need to trade directly with the market maker. They may also go through another local stock broker who trades with the market maker. The market maker they work with may be in the country where you are trading or elsewhere. For example, there are London-based market makers who buy and sell US stocks to UK-based brokers without trades ever taking place near New York.

As an ordinary investor, you probably don't care much about how all of this works behind the scenes. And unless you need really fast trading and the best possible price, it often won't make a big difference to you.

But it is obvious that the more intermediaries that an order has to pass through, the higher costs will be. So if you have to trade frequently in a particular market, you will probably want a stock broker that goes through fewer middlemen.

5. Be cynical regarding extra "bells and whistles"

Some stock brokers provide a basic service, offering trading services and nothing else. Others will send you regular market analysis or have websites full of fundamental company data. Some of them include free streaming price data and some offer level 2 data, usually at an additional cost.

Some of this information can be very useful. However, most of it won't be relevant to many investors - the long-term investor doesn't really need a live level 2 price feed, for example. And you may well be able to get the same information, either better or for less, through a separate supplier.

Think carefully about whether all the extras that a stock broker promises are relevant to you. You may be better off with a simpler, cheaper broker and while subscribing separately to any extras that you need.

6. "All-in-one" solutions aren't always the best solution

This article is mainly focused on stock trading and in particular that of international stocks. But many companies offer a wide range of other investing services such as the trading of contracts for difference (CFDs) or currency trading.

It can be handy to have everything in one account, but be sure about what you're getting. In many cases, some of the services promised by a broker are "white label" products, that is, they are provided by a third party under the broker's name.

This means that you will often pay two sets of fees, one to your stockbroker and the other to the white label product provider. If you want to use these services, you will often get a better deal by choosing your stock broker solely for their stock trading and getting your contracts for difference or forex trading account directly from a separate forex broker. (See our forex broker comparison)

7. Seek out a flexible and practical broker

At the same time, seek flexibility and diversity in the specific services that interest you. If you're looking for a stock broker, consider whether they offer tax-efficient accounts, like "PEA accounts" if you reside in France. Lowering taxes can make a big difference in your investments' returns, especially for high-rate taxpayers.

For international investments, a multi-currency account - which allows you to hold cash in several different currencies - is essential and should be offered at no additional cost. Most stock brokers take a commission every time you convert British pounds into a foreign currency and vice versa, for example, so you want to keep the frequency of these trades to a minimum.

See if they allow you to transfer money that's already in the foreign currency you want to use. By transferring money from a foreign currency bank account or hiring a foreign exchange specialist to do the conversion instead of letting your stock broker do it, you could save quite a bit in terms of commissions.

8. Make sure that you like the broker's service

No matter how good a business looks like on paper, it won't help you if the online trading platform is slow and buggy, the phones are always busy, or the customer service staff are unhelpful.

I recommend asking for recommendations from other traders and/or looking online for people's opinions and reviews. However, remember that traders who fail tend to blame others for their mistakes, so always assess the credibility of a review.

Also, bad reviews always outnumber good ones, because people are more motivated to review something that went wrong, rather than praise a broker's good service or merits. But if every review is bad and everyone is complaining about the same issues, this is probably a warning sign.

There appears to be few links between cost and service. Some very low cost providers provide exceptional service, while others, which are relatively expensive, are disorganised.

9. Don't overpay

Don't forget that a broker's business depends on the amount of commissions and fees it generates. So it may try to encourage you to trade more often or to sell you services and products that you don't need.

If you have a broker or a personal advisor, sometimes their income is tied to the commissions they generate. That's not to say that they will all advise you to trade too much for profit, but bad ones will. Don't be pressured into doing something you don't want to.

10. Stay safe

Make sure you only do business with reputable brokers and understand how investor protection rules and compensation systems will (or will not) protect you in the event of a disaster.

You should always be careful and only use well-regulated brokers. Never send your money to a dubious company that no one has ever heard of that is based in a country that doesn't have rules to protect you.

And this doesn't just apply to investments abroad, but also to domestic investments. Only use brokers that are fully regulated by local securities laws. And if someone cold calls you trying to sell you stock, hang up the phone and report it to the regulator.

Last but not least... make sure you've shopped around!

Having said that, the most important thing you can do is compare brokers with each other. Don't just go with the first broker you find.

When you have a shortlist of companies, consider signing up with more than one. It is hard to decide if a broker's service is right for you until you have used it for a while.

Remember that you can open multiple accounts. Since different companies tend to be better in different niches, this is often the best solution.


Recommended stock broker

Account typeStock trading account, margin account (79% of CFD accounts lose money)
Management by mandateNo
Stock brokerage feesNo commissions for a min. monthly volume of €100,000 EUR, otherwise 0,20%.
Demo accountYes
Our opinionTrading without commissions, but with a very limited choice of 2,000 shares and 16 ETFs.
Broker reviewXTB
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