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What to look for when choosing a broker?

Jamie Cameron
29. 8. 2022
6 min read

Choosing a broker is one of the basic pillars before entering the investment world. Today we will look at how to choose a broker and what to look for when choosing one. It happens that some people choose their broker and then are unpleasantly surprised because they didn't find out some basic information, which eventually leads to investors moving on to other brokers. But why not do it straight and proper?

What is a broker?

The basic definition of a broker:

A broker, or broker, is a person or company that arranges for individual investors to trade in the financial markets. It charges fees for doing so. The activity of a broker is licensed; in the Czech Republic, the Czech National Bank issues licenses. If an individual (investor) wants to trade on the financial markets, they need a broker to do so.

What should I look for when choosing a broker?

1. Security - Is my money safe with the broker?

  • Look at whether your shares are held in segregated accounts. This actually means, simply put, that if your broker goes bankrupt or has any problems, your shares will be released to you (you won't lose them) as they are held with third parties.
  • Another factor of safety is the deposit insurance that your broker offers. In other words - protection for your money. Each broker has this individually and offers you a certain amount of insurance, which would mean that if you go bust again, you won't lose everything. The amounts can vary individually. Logically, we will look for the highest possible sum insured.
  • The insurance covers the loss of the client's assets in the event of a financial failure of the trader.

2. Financial stability of the broker

The broker's business is another risk factor in investing. In my own words, I would explain it as follows: if you analyze a stock, you spend hours of time in reporting and analyzing that company. But do you do the same when choosing a broker? I think many newbies certainly don't. Just look at the Trading212 fans who mindlessly jump to a broker just for a free stock (I am not undermining the quality of TT212 broker).

Is it worth analyzing the broker in a similar way? I think it definitely is. It is wise to entrust your investments to reliable, proven and financially stable brokers. Any of us can simply look at the history, tenure, reviews and financial statements of certain brokers that are holding up well in the stock market. What's the bottom line? For the broker to be financially successful, which again will promote some security and my peace of mind (low debt, strong balance sheet and cash).

3. Fees

Another very individual part of each broker is the fees or initial deposits. Many experienced greasers will tell you that fees are expendable and simply put probably won't put you down + you want your broker to thrive to again eliminate the risk of potential bankruptcy.

  • As I've written before, it's a very individual thing. Where one demands fees for deposit, withdrawal, opening and closing a trade, the other broker may offer much more attractive terms or zero fees. However, I personally work out these details and compare these terms.
  • Another point is the minimum deposit. Here I will borrow the example of one particular broker, which is LYNX. The broker is attractive to many individuals, but the initial deposit amount is 75 000,- CZK, which can put off many smaller investors right from the start. However, this is not a rule, some brokers require a deposit of a few tens to hundreds of crowns. Please note that this is a deposit that you can normally use (it is not a fee).

4. What I can invest in

Each broker offers different asset classes and has different options. For example, some people look for US, European or Czech stocks, but after a few moments with their new broker, they are surprised to find that they don't actually offer them (or only a fraction of them). The same can be said for other investment instruments. Always look at the broker's offerings (the variety and number of stocks, ETFs, commodities, etc. offered).

5. Dividend taxation

What is Form W-8BEN?

It is a declaration by an investor who is neither a citizen nor a resident of the U.S. that certifies that his or her tax home is a country other than the U.S., such as the Czech Republic.

By signing this form, income from US dividends is then subject to the "Czech" 15% withholding tax instead of the 30% withholding tax. Please note that not every broker will arrange for the investor to sign this form!

  • If your broker offers to complete this form, you will avoid double taxation of dividends (you are not subject to 30% tax, but only 15%).
  • It also depends on where your dividend is coming from 👇

For example, for dividend income from a Czech-based joint stock company 👉 15% withholding tax is paid directly by the company that pays the dividend to the investors. The investor will thus receive a dividend on account that is already reduced by this tax.

  • But I would be careful with Czech stocks, where with such a broker Degiro you tax our domestic stocks 35% (I give this point as it turns out that some still don't know about it).

Conclusion

There are of course more insights and information, but I would hate to bore you with a long text and countless points. Other things that I already take as such a superior but many may look for are: currency conversion, trial account (where I trade for real with unreal money), clarity and simplicity of the platform, various materials and training programs, possibility of good communication and feedback (support), tools in the sense of pie and charting and for example the fractional share offer where you can only buy a part of a share. I hope I haven't forgotten anything, I think this summary is enough to make the right choice of broker.

  • What do you focus on when choosing a broker?
  • Is there something that a broker has to meet that you look for?
  • What broker do you use?

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