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How to Choose a Broker | Beginner Trading Guide

About Brokers 

A broker is a company that acts as an intermediary between traders and investors and the market. Most traders will instruct their broker online through a trading terminal and the transactions will be executed almost immediately as it’s mostly all computerised and automated.

There are two types of  broker accounts you’re going to need,

  1. Demo account 
  2. Live Account

You're going to need the demo account while you’re learning. This is a practice account offered free by brokers and gives you a chance to trade without risking real money.

Once you have achieved consistently profitable results on your demo account, you might consider moving to a live account. 

How to Choose the Right Broker for You

There are many different brokers, and it can be challenging to choose the right broker for you. 

Here are some of the essential points to consider when choosing your broker.

What Type of Regulation the Broker Has

Some sort of financial services authority will regulate financial services companies in most jurisdictions. 

This ensures they follow certain procedures and practices by law since they handle money on clients' behalf. Therefore you want to ensure the broker is regulated.

In particular, you should look for regulation by major regulators in big financial centres—for example, the UK FCA, the USA SCC, the Swiss Finma and the German BaFin. If a broker is regulated by one of those, they are likely to be providing a fair service.

This information is usually displayed directly on the brokers website.

Suppose you are ever unsure about a broker's regulatory status. In that case, you can always contact them to request the regulation registration number and cross-reference this with the register provided by the regulator. 

Your Location

Your location will also matter for which broker you choose. 

It may be that some brokers won’t accept clients from your country, which may be due to regulatory requirements or other legal issues. This is often the case for traders based in the US, as many brokers won’t take on US-based clients.

Spreads

The spreads are the difference between the price you can buy and the price you can sell. Most brokers will make their money through the spread or commission on each trade.

The wider the spread is, the bigger the difference between the buy and sell price, the more you pay for each trade. 

Usually, the most popular assets will have the tightest spreads with each broker, but there will be differences between one broker and another. This will often depend on the size of the broker and the assets they primarily focus on.

Therefore you want to make sure that you choose a broker that offers the tightest possible spreads for the assets you intend to be trading.  

For more detailed guide on what spreads are see,

What is The Big-Ask Spread in Trading

Some brokers will offer a fixed spread per market, and others will have a variable spread which will fluctuate depending on market conditions.

Typically for major currency pairs, you can expect spreads of around 1 pip. 

The Assets Offered by the Broker 

If there are particular assets you want to trade, you need to check if the broker offers them in the first place and the size of the spreads if they do offer them. 

Different brokers will have different spreads for different assets, depending on how big a market is. For example, brokers that focus mainly on currency trading may also offer cryptocurrency trading. However, their spreads may not be as tight, and the platform might not be as suitable as brokers who focus solely on cryptocurrencies. 

As you progress with your trading, this may mean you have multiple broker accounts and use different brokers for different asset classes.

This information is usually available on the brokers' website.

Their Business Model

You want to look for brokers that make money from either spread or commissions per trade.

Typically, this model can be found with brokers offering ECN - Electronic communication network or STP - Straight-through processing. These brokers typically transact your trades directly into the market or with liquidity partners.These are also known as NDD - Non-Dealing Desk brokers. 

On the other hand, some brokers profit by taking the opposite side of your trade. Meaning they have an invested interest in your trades losing.

These brokers will be holding you on a B-book and manage your trades internally, usually through a dealing desk.

Leverage

Leverage is the amount your broker is willing to lend you on your trades. For example, a 100:1 leveraged account means that the broker is willing to allow you to have 100 items of the value of the money in your account.

The amount of leverage a broker can offer depends on the country's regulations. For example, under ESMA regulations, brokers can offer a maximum of 30:1 for retail traders and 500:1 for professional traders in the UK.

Typically for forex trading, 30:1 should be an adequate amount. 

For more on leverage see,

What is Leverage in Trading? (Should you use leverage?)

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