One of the first associates you’ll need to put your money to work is a broker. Everyone has a vague idea of what brokers are. Then, when you actually want to open an account, with your money, you’re reminded of the confusing terminology that makes finance so scary. And really, the internet has so revolutionized brokers that the old “call your broker on Wall St.” image is ancient history.
The world needs an updated idea of brokers. My friends, we’re here to clear things up and make it simple.
What’s a Broker
A broker’s primary role is a middleman, connecting you to exchanges where stocks, options, commodities, and other financial assets are bought and sold. Removing all the sophisticated marketing, a broker is simply an order taker to whom you instruct at what price you want to buy or sell something. The broker takes the order to the exchanges, makes the buy or sell for you, and takes a commission for doing this. We’ll let you in on something. Brokers make money on commissions whenever you buy or sell, not according to how well your portfolio does, but by how often you trade. For you, that means it's in your broker's interest to have you trade as often as possible, not necessarily to make money.
The broker’s function, which used to go through a complex network of phone lines, is now a single click through a broker’s website or app. Nowadays, the term broker mostly refers to the broker company such as TD Ameritrade or Merrill Lynch. Live brokers, what you may know as stockbrokers, aren’t completely extinct yet. Most broker companies still offer some sort of full-service where a human broker helps you with the buying and selling.
Pay attention: human brokers are salesmen who provide customer service. Look to your broker for assistance on buying and selling at the price you want, or locating an asset you want to trade. But a broker is NOT an analyst, NOT a strategist, and NOT a money manager. A money manager is the only one listed here who’s job is to make money in the market.
What to Look for In a Broker
Sure, we’ve listed tons great of Brokers, large and small, on MarketHeist, and there are many more out there. The differences between brokers simply comes down to the features they offer and the quality of those features. More features usually cost more. Higher quality features usually cost more. No surprise there.
- Access to Markets. A broker’s primary job: allowing you to buy and sell the types of financial assets you want in the market. They may offer stocks, mutual funds, managed futures, bonds, derivatives (options and futures), annuities, and insurance. Major brokers offer trading in practically all US markets and on all exchanges. This is what the internet makes possible.
- Software, usually called trading platform. The software and apps, including mobile apps, where you place buy and sell orders with just a click. Advanced orders like Stop Loss orders and Limit orders come standard now. Basic trading platforms provide price quotes, volume, and other market data as well as charting software and account management software. Some brokers’ platforms have a ton more features but cost more in terms of commissions. We’ve listed many software and platforms on MarketHeist that you can use instead.
- Execution Speed and Reliability. Not all brokers’ connections to the exchanges are created equal. This is what separates top tier brokers from the bottom rung. Good brokers will have your orders executed at the price you specify or better. With bad brokers, you often end up paying a lot more than what you wanted to buy something for, and sell something for less than your order instructions. This is especially critical in market crashes or big market drops when reliable order execution is necessary.
- Research and Advice. Most brokers provide research material to help you understand your investments and market conditions better. The big Wall Street brokers like Merrill Lynch have their own research department with their own research reports, while online brokers give you access to other research companies’ reports. However, this kind of basic research is available to almost everyone. The really valuable research reports are less publicised, but we have them listed on MarketHeist’s product list.
- Education and Support. Sure, you just need a computer or mobile device to manage your account. Still, you’ll want live brokers and technicians on the phone in case of an emergency. After all, it is your money on the line. And if you don’t understand how the markets work or have questions about a certain investment, brokers now have free live classes every week as well as hours and hours of recordings. They provide it all if you want to learn about it.
- Commissions and Fees. Someone’s got to pay for all of the goodies and services we just listed. Costs to check for: Maintenance fees for just having an account, commissions when you make a trade, and minimum deposit requirements.
Choosing a Broker. The Bottom Line.
With the broker you use for investing, look for a wider selection of funds, bonds, and managed investments (such as managed futures) in addition to stocks. Put more emphasis on other financial services they provide and live professionals who can assist you, even though the commissions may be higher.
On the other hand, the broker you use for trading should really emphasize technology, speed, and reliable execution. With a trading account, you’ll be buying and selling more often than your investment account. Look for brokers such as Interactive Brokers who have much lower commissions so fees don’t stack up and devour all your profits!
ETN (Exchange Traded Notes),
ETF (Exchange Traded Fund),
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