How to Choose a Trading Broker
If you’re new to trading, choosing the right broker to work with can seem complicated. With so many options out there, it's important to know what to look for such as regulations and the assets you're looking to trade. Let's go through the key factors you should know when choosing a broker.
What Is a Broker?
If you want to trade, you’re going to need a broker. If you’ve had a search online already, you’ll see there isn’t a shortage of options!
But what is a broker doing for you? They act as an intermediary between you and the markets. They are executing the trades that you tell them too.
There are two main types of account you can have with a broker:
- Demo account
- Live account
A demo account is a practice account which gives you a chance to trade in real time without having any money at risk. But a live account is real money trading, you’d have to deposit funds to trade with.
If you’re still learning to trade, then I'd recommend starting with a demo account for now, but if you’re ready to start trading with real money, then you may be considering a transition to a live account.
So let’s cover some of the most important things you should know when choosing a broker.
Regulation
Firstly, and most importantly is regulation. Being properly regulated ensures they follow specific rules and practices, and importantly, they are handling your money appropriately. However, not all brokers are regulated, and not all regulators are equal.
You’ll want to make sure they are covered by one of the big regulators, particularly ones that cover the country you live in. In the UK, this would be the Financial Conduct Authority, also known as the FCA. They are pretty strict with what brokers can and can’t do, and they also insure some of your money if the broker goes bankrupt.
Regulated brokers are also required to collect some information from you when you open an account. They usually ask for personal details, like your income and proof of identity. Don’t worry, this is for legal purposes, which include anti-money laundering.
Location
The next big thing to consider is the location of the broker. Many brokers won’t accept clients from other countries due to regulations. For example, many US brokers will only allow US clients.
Products and Spreads
The final two points we’ll cover go together - the assets they offer, and the size of the spread.
Firstly, you want to make sure the broker you choose offers the assets you want to trade. But to go a bit further, some brokers specialise more in certain assets.
if you want to trade currencies, you should use a broker that specialises in currencies. If you want to trade stocks, then a broker catered to stocks, the same for commodities, options, spread betting and so on.
This is because a broker that specialises in a certain asset is more likely to have tighter spreads. The spread being the difference between the buy and sell price, basically your cost to open the trade. A lower spread means more money in your pocket!
A broker that specialises in currencies, should have tighter spreads and lower costs than a broker that specialises in stocks. If you want to trade different assets, you can always open multiple accounts on different brokers. You’ll also want to compare the spreads across different brokers, even if they specialise in the same thing.
Charting Platform
One last point to consider is which charting platform you want to use. Metatrader is a good option for currency trading which is offered for free by many brokers. Tradingview is also a good option but it does require a subscription to access some basic features.
That pretty much sums up the main points for opening a trading account. We’d usually recommend opening a demo account with the same broker you plan on opening a live account, but it doesn’t matter that much.
To sum up:
- Check they are regulated by a major financial authority
- Find one that accepts clients in your country
- They specialise in the assets you’re looking to trade
- They have competitive spreads on the assets you trade
- And finally, they offer a charting platform you want to use