For people thinking of trading in the financial markets, the first thing to do is to open a trading account. And with countless platform providers to choose from across the world, selecting a platform to be your preferred broker can be more significant than most of us realise.
From the get-go, most providers appear homogenous, offering very similar services. However, once you take a closer look at what they offer, you will start noticing differentiating factors.
1. Transaction Costs
Whenever you buy or sell financial products such as stocks, Contract for Differences (CFDs) or Foreign Exchange (Forex), you will incur a transaction cost. This means the more you trade, the higher this cost.
Left unchecked, transaction costs can significantly eat into your profits (or increase your losses). To counter this, it is important to ensure that transaction costs are not excessive to the point where it paralyzes your ability to profit from trades.
Transaction costs can be charged in two forms: either as a commission on the transacted value of the trade or via the bid-ask prices, which are quoted net of these commissions (i.e. commonly referred to as the “bid-ask spreads”)
Unlike the traditional moneychanger, the bid-ask spreads offered by brokerage firms in the financial markets are extremely competitive. For example, IG may charge a spread starting from as low as 0.8 pips, with the buying and selling price for 1 EUR/USD contract to be $1.1008/US$1.1000.
Note that for CFDs you have the added advantage of trading on a margin i.e. you are able to leverage on your investment commitment. This additional benefit will however incur the funding costs associated with financing this leveraged amount.
2. Reputation Of Company
The internet has truly globalised personal finance. In the past, retail investors could need to rely on making calls to their trading representatives to buy or sell their investments. Today, all you need is a good internet connection to utilise any platform offered by providers around the world.
The downside to this however is that there are many small and obscure providers offering brokerage services out there. Some of these firms offer extremely low transaction costs to entice clients to use their platform.
Yet for asset classes such as CFDs, it is wiser to utilise a well-established company for trading. This is because these asset classes require the trader to take a position against the provider, who would then need to hedge its position in the open market.
A provider that does not hedge itself adequately would face the risk of making substantial losses. If the losses are too big, the company could become insolvent. In such instances, traders that have an open position against the company may suffer a counterparty risk, where the company is unable to honour the trades they have made.
3. Platform Provided
User experience and availability of tools are key considerations when selecting a platform. These comprise customisable features and charting indicators. Other must-haves include stop-loss features and even automated trading.
4. Mobile Support
In today’s context, being able to use your phones or tablets to conduct and check on trades is vitally important as people are spending more time on their phones and constantly have their phones with them over laptops or desktops.
Before opening an account, check if the provider has an app that allows you to trade through mobile or tablet devices. If they do, it would really help you in the long run.
5. Ease Of Opening An Account
In other words, we are looking for the most convenient option most of the time. A low barrier of entry is something that almost all of us appreciate. Being able to open an account online saves us the time to physically head down to the office to sign up.
Likewise, not being required to put up a minimum funding amount to open an account gives us the flexibility to test drive a platform first, before deciding if we are comfortable enough to use it for live trading.
6. Products Available
The variety of products provided by the platform is important. You do not want to be in a situation where you have to manage multiple trading accounts simply because each of these platforms do not have all the products that you would want to trade in.
For example, if you intend to trade in equities, indices and forex through a CFD to gain the leverage advantage, then you would want to have a provider that offers all these instruments in their platform, rather than have one without the other.
Other areas to note include checking if the platform enables you to trade across a variety of asset classes and geographical markets.
One down side is that one single provider may not offer the most competitive platform for all products, so we sometimes may have to go with the option that we’re able to live with.
7. Educational Support
Educational support is one of the most important factor that is frequently ignored by people and platforms. To have a chance of being successful in trading, you need to understand what is it that you are actually doing. Trading, unlike gambling, requires a lot of skills, knowledge and experience.
Established providers such as IG offer valuable support for their clients in the form of an educational programme. This programme is tailored to traders with different levels of expertise, and includes a series of workshops led by industry experts designed to assist clients develop their skillset and trading strategy. Topics in these workshops include forex trading, algorithmic trading and technical analysis.
Choose An Account That Best Suits What You Intend To Do
We believe there is no one right answer when it comes to choosing the best trading account. Most of this really depends on what is it that you intend to do. If your intention is to make more frequent trades in multiple asset classes, then a CFD provider like IG would make sense.
If your intention is to make periodical or one-off investments into local blue-chip stocks and hold the stocks for a few years without the need for leveraging your investments, then a standard brokerage account may be more suitable.