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Seven Key Questions You Should Ask Before Choosing Your Stockbroker


It can be daunting investing on the stock market. All transactions on a stock exchange must be undertaken by a registered broker or member of that exchange. So it is important to seek out the best stock broker for you.

You will also be charged a fee or a commission, which often varies depending on the amount you invest, the frequency with which you trade and the type of service you sign up for. So what are your options?

Seven key questions you should ask before choosing your stockbroker include: the type of service your prospective stockbroker or brokerage firm offers; which of these services is most suited to you; what types of tradable security your prospective stockbroker deals in; which tradable securities are right for you in terms of your risk profile; whether your prospective broker is a specialist in an area of particular interest to you; whether the broker has established its own independent in-house research team; and how extensive its research coverage is.

When choosing a service it is worth bearing in mind what the world's most famous investor Warren Buffett once famously said: "Price is what you pay. Value is what you get". In other words, what value do you put on paying for expertise?

The scope of the service offered by your prospective broker is likely to fall into three main types. Each of these generic services has its merits. The key question is which one is best suited to your requirements.

Execution only brokers simply execute a client's instruction to buy or sell a security i.e. stocks, shares, bonds, etc... Whilst this is usually the cheapest option typically offering the lowest commissions, it is probably best suited to the experienced investor, who does his or her own research.

At the opposite end of the scale is discretionary stockbroking where you employ the stockbroker to make decisions on your behalf and to invest for you. The broker typically constructs a portfolio of investments to meet your investment objectives and is given the authority to buy and sell investments on your behalf. This is often suitable for the more inexperienced investor or people who lack the time to do their own investing, trading or research.

An advisory stockbroking service sits somewhere in the middle. Here the investor takes advantage of the broker's in-house research tools to help them choose investments. Your prospective broker typically advises you on which sectors or stocks or bonds to consider for your portfolio but leaves the actual decision to invest up to you.

On major global exchanges there are a whole host of assets, asset classes, instruments and derivatives that can be traded. The list includes: stocks and shares; bonds and gilts (government stocks); collective funds, such as mutual funds or unit trusts; Exchange Traded Funds (ETF); and derivative and margin products, such as options, futures, contracts for difference (CFD), foreign exchange (forex) and commodities.

As part of your dealing services checklist you need to check which equities and government or corporate bonds your stockbroker is allowed to deal in. For example, does this include domestic as well as foreign stocks and bonds? You should check out any additional charges for dealing in foreign stocks or bonds i.e. handling and currency fees, if any, and also whether you need to sign any additional tax forms for foreign holdings.

Also check out which collective investments (e.g. mutual funds, unit trusts) that your prospective broker recommends or manages, if any, and what the risk profile and track record of these funds are and whether this is consistent with your investment objectives.

As part of a wider investment remit it may be worth finding out about ETFs and how these can potentially address sector, macro economic and asset allocation issues, such as exposure to precious metals, commodities or market indices. It is worth noting that annual charges for ETFs are often lower than for other managed funds.

It may also be worth reading up on derivative and margin products. The list includes contracts for difference (CFDs), options, futures, warrants (traditional and covered), spread betting, foreign exchange (forex) and commodities trading.

However, you should definitely consult your financial adviser before proceeding to check whether these types of product are suitable for you. Margin products can offer leverage where the investor is allowed to deposit a fraction of the underlying value of the trade. This works both ways amplifying positive and negative rates of return. It is possible therefore to lose more than your original investment, which makes such instruments very high risk. Foreign exchange (forex) trading and commodities trading are also very high risk and typically the domain of the professional trader.

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