Any wannabe investor must ask him or herself the following question before trading online: which broker should I choose to trade Forex, stocks or crypto-currencies? Unfortunately, this simple question has no simple answer because there are so many UK Forex brokers to choose from.
Know yourself, as an investor
First, you’ll need to know what kind of investor you are. Are you actively looking to day trade, or do you prefer to invest over the medium to the very long term? There’s no right or wrong answer to this question.
To help you form an opinion, you might want to consider:
- Your financial position.
- Your understanding of the financial markets.
- How much money you can afford to put to work in the markets, and put at risk.
- How important achieving gains in the market is important to you and your objectives.
What criteria should I consider when comparing brokers?
Find a broker you can trust
Some online brokers, based out of tax havens, have aggressive commercial strategies, which may seem attractive at first sight. They’ll promise razor-thin spreads, super-fast trading conditions and eye-popping bonuses.
But beware of offers that seem too good to be true. If a broker promises zero fees, you’ll need to understand how he earns a profit. He could earn hidden fees when you pay money into your account, or withdraw profits, through currency conversion fees, or administrative fees.
Likewise, if a bonus sounds too generous, you’ll need to check under what conditions you may be entitled to withdraw the bonus or just profits to your bank account, if at all.
Consider the following, when assessing a broker:
- Regulation: in which countries is the broker registered and regulated?
- Financial strength: is the broker audited, and do they publish company accounts?
- Reputation: how long has the broker been in business? And what have other traders written about this broker online? You’ll be surprised at how much information you can find online.
Assess a broker’s fees
Brokers earn money by either charging a commission on each trade, or what is known as the bid-ask spread, in the industry’s jargon. And in some cases, brokers have been known to charge both a commission and a spread.
The spread is simply the difference between the price at which you can buy and sell a security. Buyers will always seek to buy something for less than the price that sellers are willing to accept. Your broker will earn money by inserting his fees into that spread.
Trading fees will vary from one broker to the next, and can also change based on the account you open, the number and size of orders you have placed in the past. That’s why you’ll need to take time to carefully study your chosen broker’s fee schedule, and compare them against the competition.
Also, be mindful that trading fees are sometimes only the visible tip of the iceberg: currency conversion fees, deposit fees, withdrawal fees and platform fees may also apply.
Leverage: beware of additional fees
Leverage is part and parcel of the trading experience. Before the European Union and Australia introduced caps on leverage, most brokers would compete aggressively on the maximum amount of leverage you could take out.
Leverage is another word for borrowing. If you are new to Forex and CFD trading, you might be surprised to learn that you can place a $100,000 order with a $1,000 down payment, simply by borrowing the difference from your broker. This would be 100x leverage.
Leverage isn’t free if you keep a position open overnight. If we were to take EUR/USD as an example, your broker would charge you the difference in interest rates between the EUR and USD legs of your trade. In some cases, you’ll pay interest and in others you’ll receive a credit. Either way, you’ll want to study those fees carefully, and compare them across brokers.
Which broker is best for you?
Fees and customer service vary greatly from one broker to the other. If you’re an experienced trader, with an interest in day trading, you’ll pay particular attention to trading fees and execution times. However, if you’re new to online trading, or looking for a more passive investment strategy, you may place greater emphasis on ease of use and customer service.