You are ready to get started investing or trading in stocks. But there are just so many brokers out there. Which broker should you choose?
Whether you’re an active trader who does many trades within a day, or you’re a position investor that does one trade a month, we’ve compiled a couple of questions you should ask your stock broker (or simply look up their frequently asked questions section of their support section) before you go all in with a particular broker.
If you are an active trader that does more than many trades a day on thousands of shares, the commission you pay becomes a large portion of your trading cost. If you decide to go with a full service broker, you could be paying more than $50 per trade. That is significant if you’re going to be making many trades a day. There are cheaper (and by no means inferior) discount brokers out there. I trade with Interactive Brokers and I pay less than $5 per 1,000 shares traded. If you intend to make many trades a day, you should also ask the broker if they are able to give you further discount off published rates.
It doesn’t matter if the broker gives you free trades but charges you a larger amount for use of their trading platform. Some brokers provide only web based trading platforms but up sells their customers a better trading desktop based trading software. Some brokers provide their customers with the best trading software for free. Be sure you are aware which trading platform you are going to get before you fund your account. And make sure you are getting the best software for your trading needs.
Not all brokers provide free data feed for their customers. Without data feed, your trading software will not be fed stock price updates and you will not be able to trade at all. E*Trade provides free data to their customers in exchange for higher commission. Interactive Brokers charges data separately. If you are a position trader that does only a few trades a month, you could consider going with a broker like E*Trade. An active trader will most probably go with brokers like Interactive Brokers.
Ability to Short
Not all brokers are the same when it comes to shorting. Shorting requires the broker to loan you shares, possibly from the account of another customer, to sell into the market. Some brokers don’t allow shorting. Some brokers don’t have many shares for you to borrow. To help you decide, most brokers have a publicly accessible websites to show if a particular stock is shortable (like MB Trading’s easy to borrow). Its best you find the broker’s list and do a quick search of the kind of stocks you intend to short, and decide if the broker is a good fit to your shorting strategy.
Third Party Software Support
Most good brokers allow their customers to access trading through third party softwares (like Ninja Trader). These third party trading software could be an alternative to the stock broker’s native software. You should know whether or not a broker has third party software support before you decide.