Assessing a Broker’s offering (10)

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.

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.

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.

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.

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.

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?

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.