Before making that Buy or Sell decision, you need to consider who your stockbroker is.
By Amr Hussein Elalfy, MBA, CFA
6/7/19 3:28 AM
Investing in the stock market is a long process that starts with stock selection and ends with a performance review. However, between picking a stock to add to your portfolio and calculating your portfolio performance you need to execute the trade. But trade execution is not just about pressing that Buy or Sell buttons; it involves selecting the right stockbroker for you. As an individual investor, there could be several criteria to consider when selecting your stockbroker, but they will all revolve around two key ideas: the best execution at the cheapest cost.
Back in the days, executing a stock trade would have involved making a live phone call to your brokerage firm or, if your portfolio was large enough, to your personal stockbroker. You would have to tell your broker the stock you are considering to buy, the price you want to buy it at, and the timeframe you want the trade to be executed in (e.g. within the day or until a future date). Imagine how long these steps would take from you, provided all went well. That phone call would have taken you at least five minutes, but nowadays it would only take you seconds to get to the same result.
Today, online trading (also known as e-trade) puts the individual investor in the driver’s seat. Gone are the days when the individual investor would not have all the tools needed to make a trade. Indeed, executing trades is no longer about making the trade itself; it involves research and analysis beforehand and ends with trade execution follow-up. The term self-directed investors or traders (SDIs or SDTs) has become a major segment in the stock market with the technological advancement of today.
But when selecting your stockbroker as an SDI, what should you consider in the tens of stockbrokers out there. Below, I list five tips to look for as your checklist when shopping around for your new stockbroker.
(1) Know the list of stockbrokers trading the market(s) you are interested in.
Stockbrokers or stock brokerage firms can have limited jurisdiction, where they would be licensed in one or more market. When you consider your stockbroker, you need to first shortlist the markets you would be interested in. If it is just one local market (be it your own home market or any other market), your best bet could be selecting a local less-known stockbroker and not necessarily the bulge bracket name you hear about in the media. If you are considering more than one market, then build your selection matrix by checking the local and global stockbrokers that trade those markets. Each stockbroker will have its price list and that price will be quite different if it came from a local broker (usually less costly) or a global one (usually more costly). Compare the transaction cost across the different stockbrokers and mark the cheapest in all markets as just one bit to consider in addition to the below points.
(2) Use research and analysis tools offered by your stockbroker.
As an SDI, you want to make sure that you have all the necessary tools to make a more informed investment decision, not necessarily the correct investment decision but at least a well-thought-out investment decision. Thus, you need to make sure your stockbroker offers research and analysis tools. Such tools range from economic and stock news to technical analysis charting tools and fundamentals database of key financial indicators. Having all those tools on one platform, as opposed to two or more platforms, will help you focus when making that investment decision. Some stockbrokers offer these tools for free, while others may charge you a monthly fee or a slightly higher brokerage fee, depending on your size of trading or portfolio.
(3) Read your stockbroker’s own or third-party fundamental research reports.
Having a fundamentals database is key to making investment decisions because it will help you understand the market and the stocks you are studying, such as market cap, corporate actions, recent earnings releases, and major news published. However, this is just one piece of the “research” puzzle. You need to make sure your stockbroker offers its own or third-party fundamental research reports. You would want to look for stockbrokers that offer either their own fundamental research or third-party research offered by other research houses. This is key because you want to know what specialized analysts are saying about the stocks you want to buy or sell before pressing that Buy or Sell buttons. Be careful here that your investment decision does not have to necessarily be in line with what those fundamental research reports are touting. After all, these sell-side research reports could be affected one way or another by conflicts of interest. That said, it is important to know what the rest of the market is saying out there. For example, consider this. You have decided to buy the stock of a company that is expected to do quite well in 2-3 years’ time. However, its latest earnings release was shy of analysts’ estimates, which led analysts to downgrade the stock rating and possible its price target. Such a negative sentiment around the stock could be short term in nature, creating pressure on the stock, so you might want to delay that Buy decision until the dust settles and you get in at an even better price. Here, the analysts’ latest views did not change your Buy decision but rather delayed it a bit.
(4) Look for other non-trading features offered by your stockbroker.
When considering your new stockbroker, do not limit your choices only to those trading the stock markets you are interested in. You should consider the other non-trading features they may offer their clients which would help you greatly in closing the investment cycle. Such features could be in the form of mutual funds or savings accounts where the excess cash in your brokerage account will be invested in until you make your next Buy decision. This will earn you interest as you sit out your next trade and study your next potential stock investment, and not push you to make an investment decision only because your cash is just sitting there. Other non-trading features include having an ATM/debit card linked to your brokerage account, having the ability to wire in to and out of your brokerage accounts funds instantly when needed, and having a portfolio tracking option to see how your portfolio is performing over time and versus selected market indices.
(5) Have online access to your portfolio anywhere and anyhow.
All the above would not be complete without the optionality to have it all accessible online using the different platforms available out there. If your stockbroker offers the above on a web-based platform, it’s good, but if it is offering it as well on a mobile platform, it’s great! Mobility has become the name of the game nowadays, so being able to manage your trades and portfolio from the palm of your hand is no longer a luxury but I would say a necessity. If your stockbroker does not offer that mobility option, you would be better off elsewhere.
By following through the above five tips, you would be able to build a scorecard for all the stockbrokers you are considering. Then you can select the one that has the highest score. By then, I hope you would be ready to make your first trade with your new stockbroker.