Picking the right broker
Now it’s time to pick the right broker. I already discussed this in my basic investing guide. To give a short reminder of all the things you should look at:
- Spread vs commission
- Lot sizes
- Broker speed
- Negative balance protection
- Available markets
- Carefully read the small letters in the contract
Spread is the difference between the bid and ask price. Some brokers don’t charge commission but instead have an artificial high spread. Zero commission trading sounds nice on paper but if you have high spreads may even cost you more. You have to know exactly how much spread or commission you have to pay. As mentioned in a former chapter, costs can have a huge impact on your end results. It’s crucial to keep your costs as low as possible.
Leverage, lot sizes and broker speed
Leverage and lot sizes are mostly used by day traders. Regulated brokers mostly have 30x max leverage. Unregulated brokers can go up to 1000. This is for seasoned veterans only. Lot sizes are mostly pre determined but there are some brokers that let you pick your own size. Broker speed can be an important factor. Not so much when you are buying stocks or other securities for the long term. But if you are day trading, good broker speed is crucial.
Negative balance protection
Negative balance protection protects your account from going below zero. Below zero means you have to pay back the amount of money you lost. This is especially dangerous when using leverage. High amounts of leverage without the use of stop losses can result in serious losses. Stocks or bonds can never go below zero. While you can lose money, you’ll never encounter a negative account balance.
If you want to invest in world wide stocks or cryptocurrencies, your broker must have that option. Most brokers don’t operate worldwide. That’s why it’s better to search for the investments you want and then look for a broker instead of the other way around. You might have the best broker but if you can’t buy the stocks or other securities you want it’s useless.
Beside spread, transaction fees and other kinds of fees have a huge impact on your returns. Once you have a clear goal, find out what fees you have to pay and compare multiple brokers.
Read the contract
Last but not least, always read the contract in detail. What will happen if the broker goes bankrupt? Is your money or other securities safe when that happens? Can your broker sell or lend out your stocks without your permission? Some brokers can lend out your stocks and when the party lending the stocks goes bankrupt you might lose your stocks.
- Picking the right broker is crucial. It can save you a lot of money.
- Be careful of high spreads or other fees.
- Find the broker that allows you to invest in the things you need. For example, world wide stocks.
Chapters: The Ultimate Investing Guide
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