Thursday, November 25, 2010

Trading Tools - The Brokerage

A brokerage is probably the most important tool to a trader.  It handles all of a traders business, keeps track of all transactions, and could potentially control tens of thousands of dollars.  Due to the huge spur of online discount brokers people are now shopping for the lowest commission cost.  The brokerage world is just like everything else with you get what you pay for, so be careful going for the cheapest.

First thing to do is find out what kind of trader you are.  When you know what kind of trader you are you can look for the things you need in a brokerage.  A lot of new traders won't know what they need or want in a brokerage until they are already committed to someone.

Here are some things you might want to consider:
  • Commission Cost - As I said before, having the lowest commission cost is not always the best, but having the highest is not always the best either.  Make sure the commission cost reflect the services you will be given.  Also make sure the commission cost are not so outrageous that you can't make any profits.  Once you've been trading at that brokerage for awhile try to haggle down your commission price.  Pay attention to the margin fees if you are opening a margin account.
  • Customer Service - You might not think you will never need to call on customer service but trust me you will.  Things will never go 100% right and you need to know there is a backend support system that can help.  A lot of times a brokerage system will go down and you need to know you can pick up the phone and easily place, change, or cancel and order.
  • Execution Speed - The speed at which an order will execute matters more if you are a day trader or an active swing trader.  You don't want to place an order to buy something at a certain price and get a price filled at a higher price.  This could severely cut into profits.
  • Clearing Firm - A clearing firm is what processes all of the stock transactions.  Knowing the clearing firm is important because they all have different sizes, fees, and rules. 
  • DRIP/Fraction Shares - If you are more into a buy and hold strategy you should find a brokerage that has DRIP (Dividend ReInvestment Program).  This will use any dividends you receive and reinvest them back into that stock at no extra cost.  What people should really keep an eye on is the Fractional Shares part.  A lot of clearing firms do not support fractional shares, so if you are a small investor you will only receive cash if your dividend can't afford a whole share.
  • Network - A lot of brokerages have a network for the investors.  This allows investors to share their trades, ideas, and you can share yours.  If this is something you are interested then check for this feature.  A lot of great information can be learned from an investor network.
  • Mobile Access - If you are interested in trading or watching your portfolio make sure they support mobile access with your mobile device. 
  • Integration with Other Financial Services - There are a couple of other financial services out there that people like to use, such as:  If you would like to integrate your portfolio into the rest of your finances make sure there is support for this.
  • Option Levels - If you are or want to trade options some brokerages will put limits on what you can do.  A lot of brokerages assign levels to the various strategies you can do in accordance of how long you've been trading, net worth, and portfolio size.  There are brokerages without levels, so match up what you want with what you can get.
  • Short Selling - Short selling is not as cut and dry as going long, so it brings with it several things to look out for.  The clearing firm size plays a big part in how easily it will be to find the shares you want to short.  If you place an order to short a stock but they can't find it the order will never go through.  There will also be "hard to borrow" fees and these fees can have a wide range from 0% to +100% of the transaction.  You need to know these fees and how they will apply to your trading. 

Like I said before it is usually not just cost that you need to look for when trying to pick a broker.  There are far more important qualities in a good brokerage.  Trading is a hard enough job without being set back by a bad broker.

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