Regardless of what type of investing you choose to pursue, you will typically need to open an account with a brokerage before you get started. Brokers are your gateway to the financial markets and many people overlook their importance when getting started as an investor. Choosing a good broker could be the difference between being profitable as an investor and losing money. Here are a few things to look for when picking your broker.
Solid Reputation
When shopping around for a broker, its reputation can tell you a lot. When traders are unhappy with execution, customer service or anything else, they will be more than happy to let you know about it. In many cases, you can check with the broker’s regulating agency to see any complaints that have been reported against them. For instance, FINRA can provide you with detailed information about a broker by using the Broker Check tool that it offers.
In addition to getting information from official sources, do some research online as well. Check sites like investing forums and message boards to get a feel for what real traders have to say about a broker. You should expect to see some disgruntled customers with every broker, but if you notice a continuing theme, then you should be skeptical.
Commissions
Even if a broker has a good reputation, you need to make sure that it has reasonable commissions as well. Find out how the broker is compensated before moving any further in the process. Some brokers charge a low, flat fee per transaction while others charge a larger fee, but provide more service. Some brokers, such as a Forex broker, will not charge a commission and will only be compensated by the difference between the bid and the ask price when a trade is placed.
When examining the commission structure of the broker, consider your investment strategy as well. If you are the type of investor who likes to buy and hold over a period of several years, commissions probably shouldn’t be that big of a factor for you. If you are a trader who likes to make several trades per day, then commission makes all the difference in the world.
Tools
The tools that the broker offers is another factor to consider. Look at the trading platform that you will be trading with and see if you understand how it works. Most trading platforms are user-friendly, but sometimes you come across one that is not easy to use.
Look at the research tools that your broker provides as well. Some brokers provide detailed educational resources like a stock tutorial or a Forex trading school. If it appears that the broker offers some good content, this is definitely a plus for you. You can further your education while you invest. Eventually, you may be able to eliminate some of the mistakes that beginning investors make.
Making the Decision
Once you’ve evaluated several brokerages, make the decision based on the information you have. Occasionally, you will make the wrong decision and still end up with a bad broker. If this happens, just cut your losses and move on to another one. When you find a good broker, stick with it. Good brokers tend to improve over time as good traders do. When an intelligent trader comes together with a solid broker, the relationship can work out well for both parties.