Knowledge Base

What Is a Broker and How Do I Choose One?

in Basics of trading
Tags: broker

The first step of investing in the stock market is getting a trading account with a broker. This could with a small, individual broker, or large brokerage firm. Without a trading account, you cannot deal in the stock market. This is why brokers are very important.

Who is a broker?

Brokers are professionals who are members of a stock exchange. They, and only they, have the right to place buy and sell orders in the stock exchange. You cannot directly go to the exchange and place an order too. You route all your orders through brokers. So, essentially, brokers are middlemen, who buy and sell stocks for their clients. In exchange for this, they charge a certain amount of money for conducting the trades. This is called brokerage fees or commission. Brokers also offer a range of services apart from simple trading. This includes helping in stock research, providing advisory services, portfolio management, stock recommendations, automatic monthly buying plans, so on and so forth. The broker may charge additional fees for these value-added services.

How do I choose a broker?

Choosing the right stock broker is one of the most important decisions to be taken while investing in the stock market. But how to find your ideal broker when there are dozens of professionals out there offering brokerage services? What should you consider while picking a stock broker? After all, every investor’s needs may differ. And not all brokers cater to every requirement of investors.

Here are some factors to consider when looking for a broker:

  • What services do you need? How would you like your broker to work for you – as simply an order-taking firm or individual, or one who also helps you make your stock trading decisions? Do you want an individual, who is available 24×7? Or would you like to go with a larger brokerage firm? The benefit of a brokerage firm is that they may allow you to trade online through user-friendly trading applications. In case of an individual broker, you may have to place orders on phone. Larger brokers may also offer several additional services like portfolio management. Compare the services you required with those on offer.
  • Inquire about the Fee Structure: Although brokers normally have a defined fee structure, some often try to make it complicated for the investor by hiding some costs. It is important that you have talked to your broker about all essential details pertaining to fees and other charges right at the beginning. Also, compare commissions with other firms. Often, brokers apply these fees as a percentage of your trade. So, the large the fees, lower will be your profits. That said, ensure that you are getting a fair service for whatever amount you are paying. So, just because a broker is charging the lowest fees does not mean his service would be good. It is always better to start with a broker on a trial basis, and then increase your trades once you are satisfied with the service.
  • Ensure Good Technology: These are online times. A significant chunk of trades are conducted online. This means the trading application provided by your broker is linked to the broker’s trading terminal. This is where all your orders are routed from. A poor technology could cause a lot of delay to your order process. In the market, the prices change every second. So such delays could affect the final price you get for your shares. This is why, it is important to ensure the technology your broker uses is of high quality.
  • How secure is your Broker: Since your broker is a middleman, he or she will have access to the funds you have allocated for buying shares. In case of larger brokerage firms, your bank account is often linked to your trading account. This is why security is very important.
  • Check for Minimums and Margin: Does your broker require that you always allocate a certain minimum level of money to your trade account? How much margin or leverage does your broker allow you? These are factors to be considered. Maintenance of a minimum balance could affect your liquidity. While a margin amount may not be applicable for those who trade on a small scale, it is very important for large-scale traders. It is the amount they can borrow from brokers while placing a trade.