How to choose a broker and open a brokerage account
- Study the ratings of bidders.
- Check whether the broker has a license from the Central Bank for brokerage, dealer and depository activities and asset management.
- Find out if it is possible to open an account online.
- Check what markets and assets are available through your broker and what limitations you may encounter.
- Check that the broker has a terminal for the platform you want.
- Choose a plan. It is better not to chase a low fee, but pay attention to the mandatory payments.
- Sign a contract for brokerage and custody services.
- Wait until you are notified that the broker has opened an account for you and registered you with the exchange.
Who is a broker
A broker is a financial institution with a special license. Sometimes a bank combines the functions of a broker, sometimes it is a separate commercial organization. Sometimes it is an organization within a financial group.
A broker is your “hands” on the stock exchange. You use a broker to buy and sell securities, make contracts, and exchange currencies.
What a broker does:
- Accounts for money and property transferred by the client.
- Registers you on the exchange and assigns special codes for transactions.
- Gives you information about the progress of the bidding.
- Receives orders from you: “Buy this”, “Sell this”, etc.
- Settles transactions – transfers money and securities.
- Gives reports on transactions, on the movement of money and securities.
- Issuance of certificates of taxes paid, price of securities purchased, etc.
The broker also works as a tax agent: he withholds and remits to the state taxes on dividends, calculates and withholds tax on profits from the sale of securities and income from futures contracts. There are many subtleties in this matter, we will talk about them another time.
How to work with a broker
1. Contracts. The first thing you do is sign an agreement for brokerage and custody services. These two types of service are mandatory, they go together. Depending on the method of conclusion, you may have a full contract with a seal and signature, a short contract notice, or even a notice received by e-mail. A contract with a single broker is signed once.
2. Opening accounts. The broker opens accounts for you in his own accounting system and registers you with the exchange. When this is ready, you receive an account opening notice. You can now transfer money to the brokerage account.
3. Depositing money. There are different ways to deposit funds into a brokerage account. The most universal one is a ruble bank transfer. Your broker will provide you with the exact details and wording of the payment destination. You can make a transfer through a bank application, Internet bank, or bank office.
4. Software. If you trade through the Internet, then in order to work with some brokers you need to install and configure a special program, the trading terminal. At others, a trade occurs through a site. How to install the program and set up the encryption keys – see the broker’s manual.
In order to understand how the terminal works, to try placing orders and not to risk real money, practice making transactions in the game mode. This can be done both before and after the conclusion of the contract.
A demo account will allow you to understand the technical side of trading, but gambling trades and real ones can be very different psychologically. Losses on a demo account are not as bad as losing real money.
Before participating in real trading, practice making trades on a demo account
5. Participation in trading. Trading takes place according to the exchange schedule. It is not possible to buy or sell shares at the off-work time.
During a trading session, you can submit bids. An order is a way of saying, “I want to buy this at this price” or “Sell this at this price. Some bids are almost guaranteed to lead to a trade, and some may not be executed at all.
Roughly speaking, you want to buy a bond for 997 $, and everyone is selling in the 998-999 $ range. Then the bid will be queued up: in case someone offers his bonds at that price. If no one offers, it will not be executed and either the broker will remove it or postpone it to the next day.
Orders can be withdrawn at will, as long as they are not executed, that is, do not lead to a trade. But it is not possible to cancel the transaction, even if you made a mistake with the price, quantity or direction.
There are situations when it is impossible to buy or sell this or that security because there are no sellers or buyers. This happens mostly with illiquid – not very popular – securities.
6. Working with reports. If during the day you made transactions or there was movement of money and securities on your accounts, the broker will report it to you. The report will come by mail or will be visible in the terminal.
7. Withdrawal of money. You can withdraw all or part of your money from the brokerage account. For example, if you get dividends, you can withdraw them. If you sell stocks or bonds, you can withdraw all or part of the money. Usually you withdraw money by bank transfer, but brokers have other options.
Withdrawal is not an instant process and can take up to three business days.
For example, the money from the sale of shares cannot be withdrawn on the day of sale of those shares.
If you made a trade today, the shares will be deducted from your account the day after tomorrow – and the money will come in the same time.
Money can be withdrawn two days after the sale of shares
All terms of the transaction, including the price, are fixed at the time of the transaction. Therefore, if from the time of the transaction to the time of actual settlement the price of the shares on the exchange has changed, it does not concern you, the price is fixed for you.
Deferred calculations create inconveniences when withdrawing, but give a number of advantages when entering and buying. About that another time.
We have understood the general scheme of work with the broker. Now let’s talk about the choice.
How To Select Broker
Risk of bankruptcy
A broker is a financial institution that engages in commercial activities. Like any business entity, a broker can go bankrupt. Like any financial institution, a broker can have its license revoked.
A broker must have a license from the Central Bank, and usually, there are several such licenses: for brokerage, dealer, depository activity, asset management.
Securities purchased through a broker are kept in a depository in the form of electronic records. Usually the depository is a separate department within the brokerage company itself.
If the broker goes out of business, you will not lose your rights to your securities. They can be transferred to another broker’s custody. But if the broker did not properly account for client assets, things will become noticeably more complicated, up to and including loss of securities and litigation.
Unlike banks, there are no government guarantees on brokerage accounts – no investment insurance agency.
There are state banks, there are leaders among private companies, and there is a “long tail” of everyone else.
Brokerage is not just about transactions. There are several other things to consider when choosing a broker.
Opening an account online. There are three options to open a brokerage account: visit the office, send notarized documents by mail or open online through the public services portal. The public services option appeared only this year and not all brokers have it yet.
Access to markets. If you want to trade on the stock, futures, and currency markets, any major universal broker will do.
Some banks, for which the brokerage business is a side business, only give retail clients access to the stock market.
Another set of available platforms and instruments may be different for brokerage accounts and IIMs. Clarify in advance which markets and assets are available through the broker and what restrictions you may encounter.
Trading by phone. Not all brokers give the opportunity to trade by phone, and the rates for this service can be prohibitive. Check in advance if you plan to take advantage of such an opportunity. This is useful if you can’t use a personal computer at work or don’t want to figure out the programs yourself.
Training and consulting. Internet trading plans with low commissions do not offer customer training in stock trading. If you need help with training, some brokers offer free webinars, while others have paid courses and classes with an instructor.
There are also special plans, usually called “Advisory” or even “Personal Broker. These plans will tell you what to buy, taking into account the size of your capital, the length of your investments, and your risk appetite.
Such plans have high subscription fees or capital requirements. You don’t know what the quality of the advice will be. No one will guarantee that they will bring you money.
Most often training at brokers courses are paid
Software. If you trade through the Internet, then to work with most brokers you will need to install on your computer, tablet or phone a special program – the trading terminal.
You may have to pay extra for Android and iPhone versions. So if you are planning to trade from a tablet or smartphone, ask your broker if you can do it and how much it costs.
Fees for the same services can vary greatly from broker to broker. In addition, each broker usually has several plans with different rates.
Broker’s commission for transactions. The broker takes a commission, which is calculated as a percentage of the transaction amount. A common commission for novice investors is 0.05-0.1%. At this rate, if you buy shares, bonds, or ETFs for 100,000 $, you will pay 50-100 $. Plus the same amount when selling. The exchange commission is about 0.01% of the transaction, sometimes it is already included in the brokerage, and sometimes it is counted separately.
The commission is counted separately from the trades and is not included in the prices. Sometimes the amount of commission is visible immediately in the terminal. You can always see it in the broker’s reports. The commission can be deducted from the brokerage account at the end of the day or accumulated during the month and deducted at the end of the month.
Minimum broker commission or subscription fee. In addition to a percentage of a transaction, a broker may have a minimum commission. For example, the minimum commission for any transaction could be 0.99 cents. Or a monthly subscription fee of 2$ of your portfolio. You need to see in each specific case how such a commission correlates to the number and amount of transactions you plan to make. You can look for a cheaper broker or increase the account size so that the minimum fee is not charged.
Depositary services and custody fees. The depositary may charge a fee if the number of securities changes at the end of the trading day or at the end of the month. For small transactions, the depository fee can be several times higher than the brokerage fee. For novice investors, it is best to choose a broker that does not have a separate custody fee.
Deposit and withdrawal of funds. Cashless deposit and withdrawal of funds is done by most brokers for free or with a symbolic commission – for example, 10 cents. You will not notice any commission if you want to deposit or withdraw money from the brokerage account.
It is more complicated with currency: the withdrawal to the account in the same bank that provides you brokerage services may be free or with a small commission, for example, 0.15% of the amount. But a transfer from the broker to an external bank may be subject to a higher fee. If you are going to convert currency on the exchange and withdraw it to a bank account, you should definitely look at the tariffs for external currency transfers.
Additional fees. The broker may charge fees for various additional services, such as submitting securities for an offer and participating in an initial public offering. If you plan to use such services frequently, pay attention to fees for them.
If you want to get a paper and stamped transaction report from a broker, that can cost money, too. But this is rarely required and is inexpensive.
The simpler, the better.
If at the first stage you find it difficult to understand what exactly you want from a broker – choose simplicity. A broker with simple rates will allow you to look around even with little money and gain practical experience in the stock market.
Investing in the stock market is like being an entrepreneur. You have to start somewhere, and then work day by day to gradually improve the result.
Look for new ideas, adapt to changes in the economy, the law, the market. The broker is only part of this process, your tool. If you don’t work with one, you find another.
A broker is not forever. If you don’t work out, you’ll find another one.
Don’t chase the lowest transaction fee, because you don’t know yet how many trades and how much volume you will make. Instead, pay attention to the mandatory fees. Over time, you will understand how the commission affects your results, and if necessary, you can find a broker with more suitable conditions.
Don’t hesitate to contact support and ask a question. You will not only be able to find confirmation of what you read in the rates, but also learn additional nuances. And you will also be able to evaluate the speed of response to your request.
Do not try to grasp the immensity. Without experience, choosing the perfect broker the first time will not work anyway. Don’t worry if you slightly overpay for brokerage services in the first year – think of it as payment for the acquired knowledge and practical skills.
You can also open brokerage accounts with several companies at once.
The simpler, the better. If at the first stage you find it difficult to understand what you want from a broker, choose simplicity. A broker is not forever.
Don’t chase low commissions. You don’t know yet how many transactions and how much volume you will make. It’s better to pay attention to the obligatory payments. Over time, you will understand how the commission affects the result, and if necessary, you can find a broker with more suitable conditions.
A full set of programs is not standard. We are used to all services having sophisticated sites and applications for all screens: even for tablets, even for smart watches. But that’s not always the case with brokers. Check that the broker has a terminal for the platform you need. Or you yourself should be ready to adjust to the broker’s programs.
Ask questions to support. Not only can you find confirmation of what you read in the rates, but you can also learn additional nuances. And you can also evaluate the speed of response to your request.
How to choose a broker and not to regret
- At the first stage, choose simplicity, especially if you still have difficulty understanding what you want from a broker.
- Check if the broker has a license from the Central Bank.
- Don’t chase a low commission.
- Check that the broker has a terminal for the platform you want.
- Don’t be afraid to ask support questions.