Choosing a Stock Broker

All share markets have rules about who can trade directly for the equities and derivatives available. That person is a stock broker. A broker’s qualifications will vary according to the market on which he is entitled to trade. A “one off” trade, say, to dispose of shares acquired from an estate, can often be handled by a bank or the legal firm dealing with probate of the will. If it is desired to trade frequently in shares then it is necessary to have a broker to undertake this business with the exchange.

It is usual for brokers to operate from companies with which customers enter into agreements. A client authorizes the broker to spend the former’s money according to instructions given. For this to operate efficiently the broker must usually have access to the client’s bank account. An account specifically for this purpose is normally created. The important point here is that the broker has access to the client’s funds without recourse other than accepting specific instructions. A high degree of precision is, therefore, necessary in the framing of the orders. Even so, the client has no idea that the intended wishes have been carried out until their effect is reported. The broker advises the client of the number of shares of which company have purchased and at what price. Only then can the client know that the correct instructions have been executed. Of necessity the relationship between the client and the broker is one of trust. If something goes wrong, the wrong shares purchased, the wrong price paid, settlement with the stock exchange not made within the allowed period, it can be a very complex process to sort out who is to be blamed. Often lawyers and courts are involved and this is always expensive for all concerned.

Choosing a broker, then, is no small matter. If the client moves in circles close to the stock exchange and to the companies the shares of which are of interest then perhaps just a “trading broker” is necessary. When client can make to his own satisfaction all of the decisions about what to buy and sell and when then the broker is needed just to deal on the exchange according to the client’s instructions. Where the client obtains his investment information about the companies of which it is desired to buy or sell a part is entirely a matter for that investor. There is no need here to go into matters of “insider trading” which is illegal on most stock exchanges. The broker just has to carry out the “buy” or “sell” orders.

Many potential investors have no ability to acquire trading information. In this case a “full service” broker is required. This kind of broker offers the client advice on what to buy and sell and when is the best time to do so. Full service brokers are more expensive than trading only brokers. There is an even greater degree of trust and involvement between the broker and the client in this kind of arrangement. Making the right choice is much more important in this situation.

There must be an alignment of or at least an appreciation of the investment strategies of the broker and the client. A full service broker must demonstrate an ability and willingness to act on his own initiative in giving advice. Ideally the broker will have a proved track record of success with other clients. The broker should also enquire into and understand the client’s attitude to trading and risk. The mechanics of the brokers trading system should be precise and simple. Since disputes, large and small, can easily arise in the client – broker relationship it is best if the two are not personal friends.

Importantly no choice should be made in a hurry. Always adopt an “I’ll sleep on it” attitude when choosing a stock broker especially it the latter seems to be in a hurry or is too”pushy”.


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