How to choose an online

broker.

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How to Choose an Online Broker

Before trading any financial instrument, you need to set up an account with a broker. What exactly is a broker? In simplest terms, a broker is an individual or a company that executes buy and sell orders on your behalf. Brokers earn money by charging a commis-sion or a fee for their service. Unlike the real estate industry where you can get by without using a broker to purchase real estate, it is difficult - if not impossible - to transact any business in the finan-cial industry without the help of a broker.

You may feel overwhelmed by the number of brokers who offer their services online. Deciding on a broker requires a little bit of research on your part, but the time spent will give you insight into the services that are available and you will not be surprised by fees charged by various brokers.

Regulatory Affiliation

In the US, brokers and brokerages are regulated by several differ-ent regulatory agencies:

SEC: Securities and Exchnage CommissionNASD: National Association of Securities DealersCFTC: Commodity Futures Trading CommissionNFA: National Futures AssociationFINRA: Financial Industry Regulation Authority

When choosing a broker, check to make sure the firm is affiliated with one of the above regulatory bodies. There are lot of acro-nyms in this industry, don’t let that overwhelm you, these orga-nizations have been created to protect the public against fraud, manipulation, and abusive business practices in the financial markets.

The financial markets are global markets and it is impossible to enforce US rules on foreign brokerages. Therefore, we find that it is good practice to choose brokers domiciled and registered in the US.

Support Today, the financial markets run around the clock, so 24-hour support is a necessity! Make it a point to know whether you can contact the firm by phone, email, chat, etc. Do the reps seem knowledgeable? The quality of support can vary drasti-cally from broker to broker, so be sure to check it out before opening an account.

Here’s a good tip: choose several online brokers and call their help desks and see how quickly they respond to your questions. This can be insightful in gauging how they will respond to your needs when you really need it! If you don’t get a speedy reply and a satisfactory answer to your question you certainly wouldn’t want to trust them with your business. Just be aware that as in other types of businesses, pre-sales service might be better than post-sales service.

Trading Platform

Most, if not all, brokers allow you to trade over the Internet relatively easy. The backbone of any trading platform is the order entry and exit process. Trading software is an important con-sideration when choosing a broker. You should be able to get a feel for the options that are available by “test driving” before you commit any funds.

Closely examine the dealer’s screen layout. It should include the ability to view real-time currency quotes, an account summary showing your current account balance with realized and unreal-ized profit and loss, available margin, and any margin locked in open positions.

Most trading platforms are either Web, Java, or a client-based program that you install on your computer. Which version you choose is a personal preference. Web based software is housed on your brokers web site. You won’t have to install any software on your own computer and

you’ll be able to log in from any computer that has an Internet connection.

A client-based software program, or one that you download and install into your own computer will limit you to transactions only to that computer. However, the “download and install” programs generally run faster and are more stable. Be mindful Mac users that most brokers only offer their trading platform application to run on Microsoft Windows - you won’t be able to install the ap-plication and will either have to use your dealer’s Web-based or Java-based trading platform. These two (the Web or Java-based) will run on any computer since they run through your browser. Java-based software programs are preferred by most brokers who think they are more safe and reliable. Java-based software tends to be less vulnerable to attack from viruses and hackers during transmissions than “download and install” software.

Again, be sure to open a demo account and test out the broker’s platform before opening a real account.

Internet

Don’t forget your high speed Internet connectionThe financial markets move fast and you will need up-to-the minute information to make informed transactions. Make sure you have a high speed Internet connection. If you don’t, you might as not even bother trading. Dial-up will absolutely not work for trading! If you plan to trade online you will need a modern computer and high speed Internet connection.

Bells and Whistles

Most brokers offer you real-time quotes and allow you to quickly enter and exit the market. These are minimal require-ments of any trading software. Upgraded software packages are usually offered at an extra monthly fee by brokers.

Most dealers now offer integrated charting and technical analysis packages with their trading platforms. These are definitely worth exploring if the charts or technical tools offered are of value to your method of trading. The level of integration with the trading platforms varies and is worth understanding carefully.

Mini-AccountsMost dealers offer very small “mini-accounts” for as little as $300. Mini-accounts are a great way to get started and test your trading skills and gain experience.

Broker features and specialtyBefore selecting an online broker, you should closely exam-ine their features and specialties. You should confirm that the prospective broker offers the investment vehicles you want to trade. Many brokerages will specialize in one instruments such as futures or options. It is good practice to know in advance your brokers specialization and competitive edge.

For example, Charles Schwab is know as the discount brokerage leader while OptionsXpress is considered to be an options spe-cialist.

Transaction CostsTransaction costs are calculated two ways: through a spread or a commission.

Spread it the difference between the bid and the ask price of an investment. Or in other words the difference between what it cost you to buy the instrument and sell the instrument right now.

Commission is the price your broker chages to execute your order. Commissions can be fixed or percentage depending on the broker. Be sure to carefully examine the commission structure and make certain that it fits your strategy. For exam-ple, fixed commission are generally better than percentage for larger transactions because your costs do not increase with the amount of money you are investing!

Check the commission structure of several different brokers and see how the costs varies on a fictional transaction. This will give you a good idea which broker fits your strategy and provides the best cost structure.

Margin RequirementMargin rates vary between brokers. Margin is basically, the amount of leverage or borrowing power the broker is willing to give you. The lower the margin requirement (meaning the higher the leverage), the greater the potential for higher prof-its and losses. Low margin requirements are great when your trades are good, but not so great when you are wrong.

Margin Account Interest RateWhen you use margin to purchase investments that are greater than your account size, brokers will charge you interest. Es-sentially margin is a loan from your broker and must be repaid when you sell the investment. Margin can be another expense to your account, so compare the margin rate between different brokers to who is most competitive for a typical trade you might place in the market!

In addition to charging margin if you borrow money from a bro-ker, most brokers pay interest on money sitting in your account. The interest rates normally fluctuate with the prevailing national

rates. If you decide to take an extended break from trading, the money in your margin account will be accruing interest.

Minimum Trading Size RequirementThe minimum trading size may differ from broker to broker. Check to see whether you can trade small amounts of shares without being seriously penalized. This is not so much the case with stock, but it makes big difference in markets like forex.

Some brokers even offer fractional unit sizes (called odd lots) which allow you start investing with a very small sum of money.

Minimum account sizeFor those that new trading and for those that don’t have thou-sands of dollars in risk capital to trade, being able to open an small trading account with only $300 is a great feature. This will limit your exposure to risk of loss and help you learn the ins and outs of trading without having all your eggs in the basket.

Rollover ChargesRollover charges primarily deal with currency trading and are determined by the difference between the U.S. interest rates and the interest rates of the other country. The greater the interest rate differential between the two currencies in the currency pair, the greater the rollover charge will be. For ex-ample, if the British pound has the greater interest differen-tial with the U.S. dollar, then the rollover charge for holding British pound positions would be the most expensive. On the other hand, if the Swiss Franc were to have the smallest inter-est differential to the U.S. dollar, then overnight charges for USD/CHF would be the least expensive of the currency pairs.

Trading HoursNearly all brokers align their hours of operation to coincide with the hours of operation of the US financial market: 9:30 am 4:00 pm EST, Monday through Friday. Remember, the eq-uity markets will usually close on US holidays, but the global equity, derivitive, and futures market may still be open!

Other PoliciesBe sure to scrutinize a prospective broker’s “fine print” section to be fully aware of all the nuances that a specific broker may impose on a new trader. It is important to read they contract and agreement carefully, taking note of your rights and obli-gations as a client and an investor.

Instant automatic execution of your ordersThis is also very important when choosing a Forex broker. You want what we call a WYSIWYG (wizeewig: what you see is what you get) broker! This means you want instant execution of your orders and the price you see and “click” is the price that you should get. Don’t settle with a firm that re-quotes

you when you click on a price or a firm that allows for price ‘slippage’. This is very important when trading for small prof-its.

TrustIn our experience we found that one of the most important factor in selecting a broker is trust. When you choose a bro-ker to transact your investments you give them your savings, your money and your future. It is important that you feel comfortable with who you choose to work with!

Finding the right broker/dealer is a critical part of the invest-ment process. It’s not easy and requires some real work on your part. Don’t pick the first one that looks good to you. Do your homework, feel comfortable with the broker and ask for other experience. A good broker can make a big difference in your success, so choose wisely!

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