broker Archives - Frugaling

When looking for a new broker, it is essential that you keep several factors in mind. It is irrelevant how much experience you have as a trader, these few points remain the same for experienced traders, professionals or new comers.

Regulation

It’s hard to believe, but there are still many unregulated forex brokers out there still. Different countries have different regulatory bodies. In Australia, you must look for a forex broker which is regulated by the Australian Securities and Investments Commission. This is the regulatory body for Australia,

Regulation is important because it provides traders with an extra level of protection over their account. Regulation by the ASIC means that they money in your account is secure, that the broker is well capitalised, under strict supervision and that you have avenues to go down and resources should things go wrong.

ECN Broker vs Market Maker

Maker makers and ECN brokers have very different trading models. Generally speaking market maker forex brokers employ a business model whereby they trade against their clients. Therefore, when the client loses the broker wins and vice versa. This creates a glaring conflict of interest as the market maker forex broker essentially need their clients to lose.

ECN brokers operate differently. They make their money from the cost of trading, usually a small commission is charged. This means that for ECN brokers it is almost irrelevant whether traders win or lose trades, these brokers are more interested in traders trading. With this in mind, you could argue that ECN brokers would actually prefer their clients to be winning traders, because this way they are more likely to stick around and continue trading.

Costs

Each time that you trade you will have to pay. This could be through commission charge or through the forex spread. With this in mind you may seem obvious to look at costs when choosing a broker. However, do also keep in mind it could be worth sacrificing a seemingly low-cost broker for increased reliability. For example, if a broker advertises low transaction costs, but then you find your trades are always being slipped on entry or exit then your broker could actually be more expensive than a broker which has slightly higher prices.

Platform

Online forex trading occurs via a broker’s platform; therefore a user-friendly trading platform is a must, in addition to stability. If the broker offers an MT4 account, then you are also onto a good thing. The MT4 platform is considered the standard in online trading platforms it is probably the most popular forex trading platform in the world; that many people can’t be wrong!

Other platforms, such as a mobile platform or even the MT4 mobile platform as well can be very useful if you know you will be checking trades whilst on the move.

A good idea is to check out a broker’s platform through a demo trading account before opening a live account and funding it. This will give you a good idea if you find the platform user friendly or not.

New York Stock Exchange NYSE Broker ETFs — *Photo: Wikipedia/Library of Congress*

Little funds, big investments

Despite great strides to make the market more friendly to those with lesser funds, it is frequently stacked against the little player. Before I was in debt, I had a paltry sum money to invest. Wanting to avoid the hassle of reporting tax gains and losses from stock trades, I decided to open a Roth IRA. There was only about $1,000 in my initial deposit.

The commissions from my initial broker made trading cost-prohibitive. Every trade was about 1% of my total account value (~$10). If I wanted to realize gains on one share of a $100 stock, I needed to wait for it to climb 20 points (ten for purchase and ten for sale). With $1,000, it becomes very difficult to invest diversely and smartly. This was a recipe for disaster, until I found commission-free ETFs.

The advantages of commission-free ETFs

For me, as a small player in the market with scarce time for research in individual stocks, it’s important to save money in trading fees and pick more diverse index funds. Mutual funds are great as a diversification strategy, but often require a sizeable sum to start. That’s where commission-free ETFs come into the picture.

In 2008, ETFs became a popular way to purchase managed (someone controls what the index is invested in) funds on the open market with live pricing; unlike mutual funds, which NAV prices update only once a day. They’re easy to trade right on the traditional exchanges, and instantly diversify your portfolio, while giving you the choice in a variety of broad-market sectors.

As the popularity rose, brokers took a keen interest in attracting new customers by offering free trades in certain ETFs. There are serious considerations to make before investing in any of these commission-free ETFs. Despite the diversification, these investments still have sizable risk and still require some research. That being said, commission-free ETFs can be a tremendous way to begin investing, diversifying your holdings, and saving money.

The Top 3 Commission-Free ETF Brokers

1. TD Ameritrade

TD Ameritrade offers 101 options and some of the biggest names are included: iShares, PowerShares, SPDR, and Vanguard. The list is a collection of Morningstar reviewed and recommended ETFs and most of them have small expense ratios (especially Vanguard ETFs). Account minimums and flexible investment options make TD Ameritrade a solid trading platform. Accounts include free CNBC TV, as well.

2. Vanguard

Expense ratios at Vanguard have always been notoriously low. They pride themselves on being affordable and smart for the average investor. This fairness easily makes Vanguard a great option for commission-free ETFs. Their group of about 45 ETFs are all free to trade within a Vanguard account. The only reason this doesn’t rank higher on the broker list is because TD Ameritrade accounts already have access to most of these funds.

**3. E*Trade**

E*Trade is the stalwart of online brokers. They’ve been around since the beginning. This broker offers about 90 commission-free ETFs from DB-X, Global-X, and WisdomTree. The largest concern with E*Trade is that these funds tend to have larger expense ratios. E*Trade offers an incredible mobile trade platform and terrific customer service. Opening a new account is easy to do.

Important considerations before you invest

Despite this great convenience and ease, here are three concerns to watch out for:

Some ETFs are traded sparingly. This liquidity problem may lead to great differences between bid/ask prices, and a trade that isn’t in your favor. Consider the volume traded each day in the ETF you hope to invest in.
Commission-free ETFs aren’t a good way to daytrade, as some companies (i.e., TD Ameritrade and E*Trade) charge an exit fee for ETFs held less than 30 days.
Beware of exploitative expense ratios. ETFs, like any other fund, charge a commission for the privilege of diversification and sometimes active management. These fees may add up over the long-term (See E*Trade as an example).

Have you ever invested in commission-free ETFs? What’s been your experience? Need some help further understanding ETFs? Read this book.

What To Consider When Choosing A Broker?