Finding the right broker is not easy. The right broker can open up your investing opportunities, but the wrong one can limit your options and push up your costs.
There’s a lot of information about different companies on this site and it can be hard to pull together when you’re trying to pick one. So in this article, I’m going to look at 10 tips to bear in mind when choosing a stock broker.
Decide where you want to invest
If you only plan to invest in shares listed in your local stock market, then in most countries you’ll have plenty of brokers to choose from. If you want to invest in some foreign markets, you may have very limited options. Check the international stock broker guide to see which firms will trade which markets.
You can have accounts with more than one stock broker and many investors do. But it’s often convenient to try to get two or three comprehensive 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.
Check costs carefully
Many investors focus myopically on dealing commissions. But stock brokers levy a wide range of costs and some will promise low headline dealing rates, only to claw it all back through high currency conversion costs or excessive account management fees.
Decide what you want from your stock broker
Stock brokers fall into three types. Execution-only or discount brokers simply carry out your trading instructions, either online or by phone. Most of the stock brokers listed on this site are execution-only brokers.
Understand how your stock broker works
This point is a bit more technical, but it can be helpful in picking the best firm.
Different stock brokers deal in different markets in different ways, especially when it comes to international stocks.
More commonly, they trade through a market maker – a company that is always ready to both buy and sell a stock and constantly quotes a price to do either. Market makers only trade with institutions and stock brokers, not directly with the public.
Depending on how your broker’s firm is set up, this could involve it trading directly with the market maker. Or it could mean that they trade through another local stock broker who trades with the market maker. The market maker they work with might be in the country you’re trading or it might be elsewhere – for example, there are market makers based in London that will buy and sell American stocks with UK-based brokers without the trade ever going anywhere near New York.
As a regular investor, you probably don’t not care much about how it all works behind the scenes. And unless you need very fast trading and the absolute best price possible, it often doesn’t make a huge difference to you.
But obviously, the more intermediaries an order has to go through, the more the costs can mount up. So if you’re going to be trading frequently in a particular market – as opposed to once in a while – you probably want a stock broker who goes through fewer links rather than more.