Updated at 2021-08-10 11:50:01 UTC
Currently, there is a wide range of online brokers that offer their services to investors from all over the world, and their number is increasing. It is becoming increasingly difficult, especially for beginners, to appreciate the differences between them and choose the right online broker. For example, you couldn't realize that dotbig.com is a trustworthy broker despite its freshness. This article will clarify which are the most determining factors when choosing the best online broker to invest in.
The factor that we consider most important when choosing an online broker is that it is a reliable company. The online broker will be in charge of receiving our money and executing with it the operations that we request. Therefore, it is essential to choose a serious, transparent, and professional broker.
One of the means we have to assess the reliability of a broker is to check if it is a regulated broker and which is the body that supervises it. As we have already commented in other articles about regulations, the fact that a broker is regulated does not automatically make it a trustworthy entity. Still, it represents an extra guarantee against brokers that are not subject to any supervision or regulation. A regulated broker is subject to a series of rules that ensure the protection of investors, the solvency and security of the funds, and the correct marketing, information, transparency, and development of its activity.
There are regulatory bodies more demanding than others. One of the most demanding worldwide is the FCA (Financial Conduct Authority), the UK's financial services regulator. In Spain, we have the National Securities Market Commission (CNMV), in Germany the Federal Financial Supervision Authority (BaFIN), in Cyprus (headquarters of many online brokers thanks to its advantageous taxation and being a member of the European Union), the Cyprus Securities and Exchange Commission (CySEC).
Many of these regulations and compliance with European directives such as the MiFID (Markets in Financial Instruments Directive) also oblige online brokers to keep investors' funds in bank accounts segregated from those of the company itself. In this way, the clients' capital cannot be affected by the financial situation of the broker or be seized by their creditors in the event of a bankruptcy. Additionally, there are compensation funds for investors in some countries that protect a certain amount of their capital (similar, for example, to the guarantee fund for bank deposits...).
Another handy way to analyze the reliability of an online broker is to turn to clients' opinions that we can easily find in forums, comments on blogs, and pages on the Internet. When evaluating these opinions, you must bear in mind that it is much easier for someone to publish negative opinions of a broker in the face of a bad experience (caused many times by their ignorance) than to find positive opinions. However, it is still useful to see common patterns of behavior and practices that the broker usually performs.
You should also thoroughly review the broker's website before registering a trading account. A transparent broker that publishes detailed information on its trading conditions provides documentation to solve your doubts. Contact and claim procedures implemented in any incident will always be more recommended than the one that only shows you its benefits but barely gives you details of their conditions. Do not hesitate to contact customer service for any detail that you do not see clearly, and thus you can also check their degree of response, speed, and quality.
In addition to reliability when choosing the best broker to invest online, we have to see that their conditions fit within our possibilities.
The online brokers may offer one or more trading accounts. When they give the possibility of several accounts, it is because each of them generally improves the trading conditions of the previous ones. Still, it is usually in exchange for a higher minimum initial deposit requirement. If the broker asks you for $10,000 to start investing and you do not have that amount, you can move on to the next one. Still, currently, the deposit is not usually an impediment since, in most, you can start investing online with deposits from $100 or even less. Of course, the more budget you have to invest, it is likely that the better conditions you can get.
Another factor is the minimum size allowed for trades: For example, a lot is a standard quantity to trade a financial product. In the Forex currency market, one lot represents 100,000 units of the currency you want to buy or sell. To allow retail investors with little capital to participate, many brokers choose to offer mini-lots (equivalent to 10,000 units or 0.1 of a standard lot) or even micro-lots (equivalent to 1,000 units or 0.01 of a standard lot). Therefore, the minimum allowed size of the operation is another factor that you must take into account when choosing an online broker.
Something similar happens with leverage, the instrument that will allow you to invest with a greater amount of money but only providing a small part as collateral. Suppose we have 1:30 leverage for a currency in which we want to invest. With this level, we will be able to invest and obtain the benefits of operating, for example, with €$3,000, only needing to provide $100 as a guarantee. It is a handy instrument for investors with little capital. Still, it also involves greater risk since if the operation goes against you, it will generate losses for the total operation. Even so, the benefit that you could obtain with a small capital without leverage would be minimal, which is why it is a fundamental instrument. Therefore, it is also a factor in mind when choosing the most suitable online broker for you.
This series of factors, like the ones we discussed in the previous point, is aimed at choosing the online broker that fits our way of operating. A fundamental part in this sense is that the broker offers the possibility of investing in the financial instrument or instruments that we are looking for (Forex currencies, raw materials, precious metals, CFDs, stocks, indices, energies, futures, ETFs, ...)
Another significant factor is the trading platform with which we are going to invest. Although for a beginner, the most important may be the maximum possible simplicity of the platform that helps him understand how to invest and take his first steps, for a more experienced trader, it may be necessary to assess other aspects such as the available functionalities, speed, instruments to help you analyze the market and make your trading decisions. Brokers that are more oriented to beginners tend to offer their own trading platforms while those that are oriented to more experienced profiles tend to offer powerful platforms such as MetaTrader 4, MetaTrader 5, cTrader,…
A greater of the platform, you will need that the online broker allows the strategy you will use. For example, if you are going to invest with an automatic trading system based on Expert Advisors, you need (in addition to the MetaTrader 4-type platform that supports the programming that these systems have) for the broker to allow its use. In other strategies such as scalping (a common way of operating daytraders that consists of operating in the concise term, opening and closing operations after a few minutes or even seconds), not all online brokers accept these strategies.
When choosing an online broker, we must also pay attention to what type of execution it provides. Basically, we can divide online brokers into 2 main types according to the execution of orders they carry out:
- Market Maker-type brokers (also known as “market makers”) are those in which operations are not carried out directly in the market but at the broker's own trading desk (Dealing Desk). The market maker brokers create an internal market for their customers and allow them to buy or sell at any time without waiting for a reverse operation to carry out the transaction. In the case of not finding this reverse operation, the broker acts as the counterpart of the operation. For this reason, in most cases, there may be a conflict of interest between the broker and its clients. Due to this operation, it is essential for Market Makers to work with reliable, regulated, and professional brokers.
Most of the brokers that we can find are of this type, and among those that also offer direct execution in the market, some are their most basic trading accounts that operate as Market Makers. The main advantage of market makers is their maximum availability to execute operations without price requotes and with more stable quotes. For these reasons, they may be more recommended for beginners or trading strategies favored by these advantages.
- STP or ECN (Electronic Communication Network) brokers are those who act solely as intermediaries for their clients' operations in the market. This type of online broker interconnects with the main liquidity providers worldwide (such as banks, financial institutions, other brokers, ...) and obtain the best purchase and sale prices available at all times. They do not have an operating desk (Non-Dealing Desk), and there are no conflicts of interest with their clients since they never act as counterparties. For this same reason, they usually allow any strategy (scalping, hedging, automatic trading, ...). The ECN brokers tend to offer lower spreads generally than market makers, but these prices tend to undergo greater fluctuations and sometimes have requotes before executing the requested orders. They are recommended brokers for more experienced traders or whose trading strategy requires it.
As we have seen in the previous point, spreads can vary a lot depending on the type of broker (market maker or ECN) and are different for each investment instrument (it is not the same for currencies, it even varies depending on whether it is a pair of currencies highly traded or with less volume) as well as changes in the case of stocks, raw materials, ...). Depending on the instrument in which you are going to invest, you should see the conditions of each broker and compare it with others when choosing the one you are going to work with. If you are a beginner, it is more advisable to worry about the rest of the factors we have mentioned than looking for the broker that offers you the lowest spread.
Keep in mind that there are brokers that can apply some additional commission to greater than the spread. You will also find brokers that work with fixed spreads, others with variable spreads, and some that offer fixed or variable depending on the trading account. This article shows the main differences between fixed and variable spreads: Fixed spreads Vs. Variable spreads.
Finally, another determining factor is the customer service that the broker offers you. Especially if you are a beginner, you will need someone to solve your doubts (which will surely arise). Look for a broker that has good customer service, quick to respond, and is professional. Nowadays, most of them give telephone support by email, skype, online chat, callback,… You can try this service before signing up with a broker and see how they work in this regard.
Many online brokers choose to assign a manager to each client so that you have direct attention with a person in charge of advising you and helping you in your first steps. Also, almost all brokers on the market offer free training to their clients: manuals in ebook format, complete courses, books, face-to-face seminars, webinars, and much more. Please take advantage of this training as long as it is of useful content.
Another common way to test an online broker's platform and trading conditions is to open a demo account. Most brokers offer free demo accounts with play money, so you can run trial trades without putting your real money at risk. Sometimes these demo accounts can be unlimited in time (so you can use them at the beginning to familiarize yourself with the trading platform and later to test new strategies), other times they are enabled for 30 days. Keep in mind that demo accounts, Despite trying to simulate a real account, have certain technical differences with real accounts(different speed of execution, absence of requoting,…). It is good that you start with the demo to test, but that is soon possible to a real account since, in the demo, you act without pressure since there is no real money at stake, which is the proper way to learn.