Better Know Your Broker

Meir Barak |


Opening a stock trading account is a simple procedure. All you need is to complete several forms and add a color scan of your current valid passport, and a utility bill such as from the electricity company or a bank statement proving your current address. In most cases, you’ll also need a broker.

In most cases, your broker will be happy to help you complete the process in one brief phone call. When the forms are certified after the broker has checked the data, the broker will provide you with details of the bank account to which you transfer money. Usually 24 to 48 hours later, your account with the broker will be credited. The broker will then send you an email with installation instructions for the trading platform, and an initial password (you can change this later). When you first operate the trading platform through your dedicated password, you will be able to see your deposit in your account, awaiting your order. If you surf to the broker’s site, you can then use the same password to view your execution history. The entire process should take between one to five days to complete.

As you can see, a broker can be very helpful for those looking to trade successfully…and profitably. However, the wrong broker can lead to significant losses. So, in order to help ensure you make the right choice, here are a few guidelines for how to choose and effectively work with a stock broker.

How to Choose a Broker

Many brokers would be happy to provide you with a trading platform, but not all of them are suited to a professional trader. You need to distinguish between brokers who designate their services to the public of long-term investors, the category where most brokers fall, and those who provide web-based platforms. They are known as online brokers. Professional brokers supplying direct access platforms allow fast navigation of direct orders to any target. Professional brokers provide trading platforms which are not web-based, but which usually require downloading and installing software and allow the trader to send orders directly to the stock exchange computer without using a slow, costly method. These are called direct access brokers. To be a successful day trader, you must work only with direct access brokers.

Can Your Bank be Your Broker?

Theoretically, yes…practically, no. Sure, every bank is a broker that also enables you to buy stocks in every stock exchange. Your money is already held by the bank, and you therefore have no need to transfer it to a separate broker’s account. Nonetheless, several problems arise if you use your bank as a broker.

Banks will generally collect commissions from you that are from five to fifty times higher than those collected by specialist brokers. Banks will generally provide a limited, cumbersome trading platform that does not display real time data and is usually suited only to long-term investors, and that’s definitely not suited to day traders. Finally, I have yet to come upon a bank able to provide you with the necessary tools.

With Which Brokers Should You Never Work?

The online broker, unlike the direct access broker, is interested in delaying the execution of transactions. If a transaction is delayed, it could lodge even greater profit in the broker’s pocket beyond the regular commission: for example, imagine a situation in which a client sells 1000 Microsoft stocks and simultaneously another client with the same broker wants to buy 1000 Microsoft stocks. The broker will prefer to execute the order between the two clients without needing to relay it to the stock exchange computer. Closing the transaction internally saves the broker costs, and sometimes even makes the broker additional profit from the spread (difference) between the bid (purchase) and ask (sale) prices. 

A spread of one cent over 1000 stocks means $10 more profit beyond the regular commission that the broker collects from both of the clients making the transaction. To create opportunities where the broker can execute orders in-house, the broker may be tempted to delay execution for several seconds. This is insignificant for the long-term investor, but intolerable for the day trader. In addition, when online brokers relay your order to the market, they will choose the destination cheapest for themselves. Usually these are market makers who will share their profits with brokers. The cheapest destination is not necessarily bad for you and can sometimes be a faster route, but your preferences as a trader are different from those of the broker. You want speed and liquidity; brokers want profit.


To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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