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How to choose the best broker for your needs?

By TheTradingBible.com , Updated on: Apr 07 2023.

Choosing the best broker for your trading needs can be quite a complicated task. Nowadays we're constantly getting bombarded by advertisements all over the internet (and even while driving on highways) where each broker claims to be the next best thing that ever happened to trading or to have the lowest commissions and the best platform out there.

The real question that we need to ask ourselves here is: How many of these claims are actually true and even if some of them are true, do they actually benefit you in any way?

What we mean by this is that maybe the "best platform" or "no commissions" are not exactly what you need and here's the logical reasoning behind this statement:

• If you're trading stocks with $10,000 capital, you'll most likely be better served with a platform that charges trading commissions instead of telling you they don't while marking the spread up very high which will result in your costs actually being much higher overall.
• If you're looking for asset quantity or particular instruments, you really shouldn't care about the aesthetics of the platform you're choosing but rather the reliability, execution speed and financial regulation of the broker. All the bells and whistles that most platforms claim to have can be found on steroids through TradingView and for free.

See where we're going with this? Not everything that shines is gold and the only real important thing is to truly understand your own needs.

Let's get started, here are the most important aspects to evaluate when choosing a broker:

• Financial regulation, licenses, company status
• Cost of trading (commissions, spreads, fees)
• Product offering (available assets)
• Trading platforms

Financial Regulation

In the majority of cases for leading countries (eg: U.S, U.K, Germany, etc) brokers cannot simply open a company and start offering services. They must obtain a license from their own government regulator which is what gives them permission to offer their services, for example: A U.K broker must be registered and licensed by the FCA (Financial Conduct Authority) as this is what grants traders or investors the layer of protection they need to be assured that their broker operates correctly through a set of rules and requirements designed by their regulator.

A few good examples of the code of conduct set by regulators for brokers can be:

• How and where they keep their clients funds or what can they actually do behind curtains with the funds
• What types of products can the broker offer based on their risk to prevent low quality financial products reaching the masses
• What type of conversations can the broker have with their own clients and in which tone (for example, the broker must only provide customer service and under no circumstances any type of financial advice)

Every single point you read above can be a life-changing situation for you when dealing with brokers that are not regulated or regulated by a low-tier financial regulator. For example:

• An unregulated broker can simply declare itself bankrupt and steal all its customer funds and most likely you won't have anyone to complain to or anyways ever see your funds again
• An unregulated broker can choose to offer some synthetic low quality financial derivative (such as binary options) which is basically worst than playing roulette at the casino and no one will stop them from doing so
• A regulated broker (by a low-tier financial regulator) can allow wrongdoings by a licensed broker as long as they are not too big and slide below the table. This means that you can end up getting horrible financial advise that flies through the grey area of it maybe being or not financial advice and end up losing all your money

Now that you understand the importance of financial regulation, here's what you can always do when choosing a broker:

• Always operate with brokers that hold at least 1 top-tier license
• Check their website's homepage and scroll to the bottom of it. When dealing with regulated brokers, you'll always find their licenses information at the bottom of the page and to be extra safe, once you find the registration or license number, google the regulators' website and find that this broker actually has an active license and that their authorised web domain is exactly the one you're looking at

To facilitate the above task, TheTradingBible.com built a few great tools for you to save your time. Let's show you how to use them:

Broker Comparison Tool

The broker comparison tool has a simple dual-layout format where 2 brokers are compared against each other, here's how it looks:

In this tool you'll find a lot of detailed information about each broker such as their commissions, spreads, founding year and many other figures but the one we would like you to pay the most attention to is the one on the screenshot above (we call it the license panel).

The license panel is a visual representation of how many "top-tier licenses" and how many "other-licenses" category does a broker have according to our own categorisation. What this license panel does is save you the time to look for each license and simply by looking at it knowing if the broker you're looking to operate with has one or not.

Broker Database

The broker database is a simple and powerful tool that will allow you to browse through our full brokers list by certain criteria (eg: FCA Regulated, Offers MT4, works with TradingView, etc).

The cool thing about this database is that we decided we wanted to show as many data points as possible in a simple format to give you a very quick overview of what each broker offers. When using it you'll also quickly find out whether a broker is regulated or not and what license count it has according to our categorisation.

Cost of Trading

The cost of trading can feel like a mystery sometimes as many brokers tend to show their fees in very unclear ways. Let's go over the few methods that brokers use to charge traders:

• Spreads (the difference between bid and ask prices)
• Overnight fees (the cost for opening and maintaining leveraged positions)
• Commissions (eg: $7 per lot traded, $10 in-and-out of every share trade, etc)
• Inactivity fees (fees for not using the account for a particular period of time)

The above fees are the most common ones but there can definitely be other types of fees for custom instruments, management fees, etc.

The first thing we recommend when evaluating the cost of trading with a broker is taking a look at their offering and figuring out if they offer "commission-free trading" or not. Here's an example on why this observation is really important:

• Example A: let's say a broker charges no commission but the spread on their TSLA stocks is $4.2. This means that per each share you trade, you're starting $4.2 in negative. If with this broker you buy (go long) 20 shares, your immediate cost will be $84 at the moment of opening the trade and there won't be a cost for closing the position.
• Example B: let's say a broker charges a in-and-out commission of $10 on U.S share trades and the spread on their TSLA share is $0.2. If you open a trade of 20 shares your immediate cost would be of $4 of spread and $10 of commissions. When closing your trade your cost will be $10 of commissions again for a total of $24. 

See where we're going with this example?

The "commission-free" broker ended up being far more expensive for a single trade than the "commission-driven broker" and that's precisely why we want to always tell you to check the real cost using pen and paper and adding all the expected numbers for each transaction.

The approach used above works for all types of assets, it's just a matter of comparing the cost that opening a particular trade could have had in one broker (could be with several options within the same broker) against another.

Product offering

Product offering can seem like a really simple subject on the surface level. If you want commodities just go to a broker that offers them, right? Well, it's not that simple especially for beginners trading outside of the United States.

The SEC (Securities and Exchange Commission) banned the sale of CFDs (contracts for difference) in the country but outside the U.S, CFDs are the most common product offered amongst retail brokers.

CFDs have earned a bad reputation due to the wrongdoings of many retail offshore brokerages but in reality they're just another financial instrument with excellent use cases for traders that have the experience and knowledge of what they're getting themselves into.

The reason we make a point out of the product offering is because many brokers advertise things like "Trade Apple shares" and in reality they're not apple shares, they're "Apple shares CFDs".

Brokers that are well-regulated (holding top-tier licenses) will certainly disclose in a very evident way that their products are CFDs or hybrid but the problem starts when some brokers don't and give the wrong impression to traders.

The importance of this point can be seen in the below example:

• If a beginner wants to invest for the long-run on Apple shares, he needs to gain access to actual shares he can buy without leverage or any kind of derivative instrument and the reason for this is that using leverage will incur in overnight fees which in the end will eat up the whole investment over a long period of time.

In conclusion, always investigate and ask to the broker you're planning to do business with if their products are CFDs, derivatives, traditional equities and make sure that the product you're choosing matches your trading / investing strategy.

Trading Platforms

Trading platforms are not really the most important point of your trading experience but they can definitely tell you a lot about the broker that you're trading with.

The majority of brokers on the financial services industry have the below platform offering configuration:

• A proprietary platform
• A third party platform offering (Metatrader, cTrader, NinjaTrader, TradingView, etc)
• A combination of proprietary and third party options

Here's what we recommend you to look at when you're analysing the platform of the broker you want to trade with:

• If they only offer a proprietary platform and when observing it you notice its a low quality product, it's very likely you're dealing with a low quality broker without the resources to create a proper one
• If they only offer a single third party platform like MetaTrader, be aware that it's very easy to set this up and you could be dealing with a low quality broker so what will give you the safety about them it's regulation and high quality offering in costs and products
• If the broker is offering an amazing proprietary platform full of bells and whistles, enjoy it but still give priority to regulation, product offering and costs as the majority of "research" tools offered by these brokers can be easily found in third party free software like "TradingView"

Conclusion

You can't get to Rome unless you're really planning to get to Rome, right? This means that the best thing you can do before choosing a broker is writing down on a piece of paper everything about your mission, especially things like:

• What trading style am I going to use or am I just looking to invest for the long term?
• Do I even care about the super platform that my broker is offering?
• Is their "no commission" offer really the best for the trades / purchases I'm planning to execute? What are some potential scenarios?

After successfully analysing a broker by doing your proper due diligence you'll most likely come to the below conclusion:

There's really no perfect all-in-one solution out there so the best course of action is identifying the strengths and weaknesses of each broker and using them for what they're meant for which will also result in you diversifying your risks and always having several alternatives.