Lesson 4 of 6
In Progress

Assessing a Broker’s offering (10)

Phillip Konchar

There is no one size fits all when it comes to choosing a broker. What might be great for a new trader might not work for an experienced trader. What might work for a medium-term trader trading oil futures might not be right for a scalper trading Cable. The good news is it is a big competitive industry with lots of brokers to choose from.]

So, how do you choose a broker that is right for you? What we’ve done is compiled a list of considerations to run through and how we might assess a broker. We’ve put these in approximate order of priority. Some of these considerations might be more or less important to you.

Protection and security
As discussed in the earlier lesson, how a broker is regulated can shine a light on everything it does, from how it looks after your funds through to how fair the OTC markets it offers are. We’ve highlighted where the main regulatory centres are for retail derivatives trading around the world and why traders tend to choose brokers from these jurisdictions.
Costs of trading
What you pay to trade is pretty high up the list for us. The main cost to review is Spread, we recommend you work out and compare how much Spread you will be paying with each of the brokers you are reviewing. Try to work this out for an extended period of time, like a month or even a year and you will start to appreciate why this is important. Please have a look at our Breaking Down Trading Costs course for an explanation of Spread and how to calculate it.

If you are an experienced trader then you know the markets and volumes you trade. If you are new to trading then look at the cost in Spread to trade £1 per point in these popular markets: Wall Street 30, UK 100, Germany 30, Gold, EURUSD, GBPUSD and USDJPY. You’ll be able to get the published spreads from a broker’s website.

For example, a trader trades £10 per point on just the UK 100 15 times a month. Broker X has a spread of 0.8 and Broker Y a spread of 1.5. The cost of spread with Broker X is 15 trades x £10 per point x 0.8 spread = £120 per month. At Broker Y it is 15 x 10 x 1.5 = £225. Over a month that is £105 difference for the same trades, over a year £1,260, over a lifetime of trading….you get the point.

If you treated your family to a meal out, ask yourself how much more would you expect from a restaurant charging £225 to one £120?

You need to be doing the same value check on your broker.

Fixed or variable spreads
We think new traders should start with a fixed spreads broker so long as they are not paying too much in Spread for the privilege – in a nutshell, a broker offering tight, fixed spreads is what to look for here. We go into more detail as to what fixed and variable spreads are in our lesson on Why is spread so important.

Regardless of whether you opt for a fixed or variable spreads broker when you do your analysis on Spread make sure you are comparing like with like. A variable spreads broker might publish spreads ‘from’ which means that is the lowest spread you can trade at, that doesn’t mean it is the spread you are going to trade at with them. Other variable spreads brokers are a little more transparent and publish average spreads – an improvement but that still might not be the spread you are going to trade at. A fixed spreads broker will publish the spreads you will trade at in market hours.

Products offered
Does the broker offer the product you want to trade? i.e. CFDs, forex, spread bets, cash shares, options, futures, and so on. If you want you to trade CFDs and not a spread bet then you should be looking for a CFD broker. If you want to trade options then don’t settle for a spread bet provider.

This check is normally binary for experienced traders but for a new trader, it is a bit harder. Please have a look at our course Financial Instruments Explained to help you work this out – remember don’t trade anything you don’t understand.

Markets offered
Again, experienced traders will know exactly what markets they want to trade. For new traders finding their feet in trading, the popular markets are probably where to start. Brokers with an extensive range of markets (some offer over 10,000 markets) typically charge a wider spread to deliver all this choice. It all comes back to knowing what it is you are trading and then being able to seek out a broker offering what you want for the best value.
Customer service
This is normally the last thing traders think about but we think it is pretty important. The first check you want to do is whether you can speak to someone at the end of the phone. If you’re reviewing a broker give its sales team a call – are they driven by converting you into an account or just helping you?

However, you’ll only really appreciate how good a broker’s customer service is if you encounter a problem as a client. Do they help you sort it? If something appears unfair do they explain to you why it is?

Trading platform
You’ve got to find a broker’s trading platform easy to use, this is where trying it with a free practice account might be an idea.

A live platform should be stable – that means it won’t fall over if the markets get volatile or lots of traders are trading with that broker at a particular point in time. It is difficult to assess this yourself and you’re relying on the regulator a bit here. This was more of an issue years ago when online trading was fairly new. However, if a broker can’t deliver a stable platform a good regulator will step in and ask them to make improvements.

We wouldn’t recommend doing your trade set up analysis on your phone but you should certainly check you can monitor your trading account from there. Most platforms offer an app.

There is general experience point to make here – is the platform easy to use? Can you find the markets you are looking for? Can you place a trade easily? Is it clear what your account balance is?

Finally, traders want fast and fair execution. Again, traders are leaning on the regulator here to check this is the case. 

Brokers normally provide charting for free as part of their platform. Try them with a practice account. Are the charts easy to navigate? Do they let you trade on the chart? Do they have all the technical indicators you want to use? Does the chart save your analysis for later?
What leverage a broker offers is way down our list of priorities, especially if you are a new trader. Again, we’ve got a separate lesson explaining what leverage is and whether its a trader’s friend.

Most of the time new traders, thinking they can’t make a mistake, seek out more and more leverage to amplify the profits they are thinking of making. They make a mistake (they are new after all) and instead end up amplifying a loss. Please do not fall into this trap we see happening time and time again. Start off with low levels of leverage and realistic rates of return. When you can demonstrate to yourself consistent returns and a clear strategy, that is when to start thinking about leveraging up.

As a guide, the maximum leverage levels allowed in the EU are the maximums for a reason. These state major fx markets can be leveraged up to 30:1, minor fx, gold and major indices 20:1, commodities and non-major indices 10:1, individual equities 5:1 and cryptos 2:1.  A new trader should trade well below these.

Brokers can offer loads of extras like analysis, news, education, events, VIP programmes and so on. These might be nice to have but ask yourself if you really need them….you will ultimately have to pay for it somehow.

Are you getting good value?

Choosing a broker is a trade-off between what you pay (the costs of trading) with what you get (all the others). However, if you focus on understanding the first five considerations you will be most of the way there.

Brokers aren’t for life

Traders need different services at different points in their development. There is nothing stopping you having more than one broker. For example, if you just trade two markets why not find the two brokers – all other things being equal – that offer the best spreads in each market?

As you develop as a trader you will learn what is and isn’t important to you.

The account opening process

When opening an account you will normally be asked lots of questions about your trading history, education and even job. What the broker is doing is assessing whether the products they offer are right for you.

You’ll then go through a Know Your Client money laundering check to ensure you are who you say you are.

Don’t be put off by this process, it is mandated by all good regulators.

Key Learning Points
  • When it comes to choosing a broker you need to take responsibility and do your own research.
  • We’ve provided an extensive list of categories you can work through when analysing a broker.
  • We don’t think max leverage levels are important, especially for new traders.
  • Make sure you are getting value, compare what you get with what you are paying (normally in Spread).
  • You can have more than one trading account and your needs will change as you develop as a trader.

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