Finding a good broker can be tough and demanding. A bad broker can perform poorly executed transactions, and can cost you a lot of money. So here’s my guide on how to find a good broker that won’t interfere with your investment performance. Here’s the criteria.
- Someone who’s not constantly giving you tips on what stocks to buy.
- Someone who’s services are cheap.
- Someone who performs a fast transaction
Brokers aren’t in the business of brokering for the sake of you financial health.They’re in the business to make a living, to make ends meet at home, which means they need to generate LOTS of commissions. And how do they generate lots of commissions? By calling you with tips every once in a while of course! By calling you with tips and urging you to act on those tips, the broker is ensuring that he makes a healthy stream of profits from your commission. The tip probably wasn’t actually intended for your financial benefit, but it certainly benefited his (the broker’s)! Plus, you shouldn’t listen to tips and just blindly follow them. I included ‘listening to tips’ as a part of my article on 7 Common Investment Mistakes. Always do your own homework. And certainly don’t trust a broker that doesn’t have your financial interest above his own.
One of the big reasons that supports the buy and hold investment strategy is that if one trades a lot, one will lose a lot of money towards paying commissions. Thus, the buy and hold believer thinks that their investment strategy prevents them from paying too much money for commissions. For example, a lot of banks charge a one way 3.5% transaction fee for buying a stock. So that means, once you close the transaction, you’ll have lost 7% of your investment towards paying commissions. And that’s not including the fact that a lot of investors like to trade around their positions a lot. But this is common sense, isn’t it? We all know that we should shop around and find an inexpensive broker, because inexpensive brokerage fees means that we can trade around our positions a lot.
A broker who performs lightening fast transactions is key. Many markets can have intraday fluctuations of 5%. So you don’t want to send in a buy order, have your broker perform a sloppy transaction and come back to tell you that he bought your stock at a price nowhere near where you told him to buy it at because he was too slow.
Before I give you my suggestion on what broker to use, I’d like to make it clear that I am in no way affiliated with this broker.
I use Interactive Brokers for my investments. Like most online brokers, IB (Interactive Brokers) doesn’t give me any tips or call me up with a “you should buy this now!”. Like I mentioned in Criteria #1, having a broker that has his own financial interests above the client’s is disastrous. Also, like most online brokers, IB is an extremely fast transaction platform. I can easily get out a positon worth $100,000 in half a minute (I tend to invest in the medium volume markets). But the main reason that I use Interactive Brokers is that the service is very cheap. They charge $1 for every 100 shares bought or sold! I tend to trade around my positions a lot, because I believe that nimbleness is a great advantage of the small investor. With IB, I virtually pay nothing for buying or selling investments.
Thanks for listening to this post on How to Find a Good Broker. Now I’ll ask the reader. What broker do you use? Comment below please. By the way, thank you to Kyle @ Penny Hoarder for an awesome comment.