How Should You Evaluate Your Broker?

by Darwin on October 3, 2017

In a world focused on deals, cost-saving, and coupons, the top priority when choosing a broker may be price for most people, at least at first glance. The last thing you want to do is lose your trading profits to a broker who charges high commissions costs after all. Worse still, some brokers slip additional charges into monthly statements, further eating into profitable stock market returns. But what if commissions costs and fees were just one part of a bigger pie to consider?


When you look beyond pricing, you will discover the keys to successful stock market trading and investing boil down to due diligence. It’s much better to pick the right stock and pay a little more in commissions than pay lower commissions on the purchase of a bad stock. So, how do you find a broker who provides great third-party research. Check out good summaries of brokers, such as this thinkorswim review, which covers aspects of brokerage firms beyond commissions.


At top brokers, you get a whole lot more for your money than just low commissions costs. You get top-rated research, and you get extensive chart studies, back-testing simulators, and often a virtual trading platform, so that you can test your strategies risk free. All these tools allow you to screen for great stocks, filter out poor stocks, and get an edge beyond what might be possible via manual research.


Another factor to consider when selecting a broker is what securities are available to trade. If you are a buy-and-hold investor, who is keen to hang tight for the long term, then buying stocks may be sufficient. But if you like to hedge your stocks during downtrends then you might want to purchase put options as part of a married put strategy, or generate income and add a little bearish hedging through covered calls.


Beyond options, bonds and futures can add diversification to a portfolio also. A more aggressive trader may wish to take on the leverage associated with futures or even forex trading while a retiree may gravitate towards bond investing to target a more predictable income during post-employment years.


When you evaluate brokers across the dimensions of tools, research, and securities, you are scratching more than the surface as you would if you looked only at pricing. But it doesn’t stop there. Dig a little deeper, and you will find that some brokers only cater to taxable accounts, while others will support retirement accounts, including IRA, Roth IRA, and traditional IRA account types. Still others will support trusts, partnerships, and joint accounts.


If your financial circumstances are somewhat complex then you will want to first evaluate your broker based on what account types they support. The last thing you need is a broker who has great commissions pricing but doesn’t cater to your IRA account or a joint account with your spouse.


After examining leading brokers on the most important dimensions mentioned above, consider some fringe features and benefits. For example, if you like to trade on-the-go, then you will want to make sure the platform is mobile compatible across iOS and Android devices.


Some brokers these days even have cool features like providing gift cards of stock, so you can actually buy a gift card for a niece, nephew, son, or daughter that they can subsequently redeem for shares or even fractional shares of stocks they might care about. A young athlete might like to receive a gift of Nike or Under Armor stock while a tech fanatic may enjoy receiving a gift of Apple stock.


Still other brokers will help you save when you spend. The way it works is each time you spend something, your mobile app that is connected to your bank account, rounds up your purchase price and deposits the loose change into a savings or investing accounts, so you can grow a nest-egg almost effortlessly and virtually without hassle.


The main thing to focus on over the long-term is smart selection of stocks and, for most people, that means choosing a diversified portfolio using exchange-traded funds or a collection of stocks together as part of an index. But even if you like to dabble and make bigger bets on individual stocks, look out for fees that can add up and hurt you over time. The major pitfall to avoid is comparing brokers on fees alone because selecting a good broker demands consideration of many other factors that are pivotal to long-term investing success.

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