One of the questions that often comes up from retailtraders is: "Which broker is the best?" ". While
it may seem easy to answer, an intelligent answer to this question requires
some explanation. Indeed, the choice of stock broker must be made
according to his StockTrading strategies since a stock broker may be perfectly suited for acertain category of trader and at the same time totally inadequate for other
traders.
What Is A Broker?
In the world of the stock market and trading, a broker (or broker)is an investment service provider who acts as an intermediary between traders
and the financial markets. The broker therefore allows traders to be able
to buy and sell securities or derivative products on a multitude of assets
(stocks, bonds, commodities, currencies, etc.).
Some brokers are multi-product, while others specialize inone type of stock product or one type of asset. There are thus stock
brokers, CFD brokers, Futures brokers, Bond brokers, etc.
In the context of regulated markets (stocks, futures), thebroker will be a member of one or more stock exchanges (Euronext Paris, London
Stock Exchange, SIX Exchange, etc.) and will provide access for its clients to
the stock exchanges of which it is a member with advantageous conditions.
When it comes to OTC (over-the-counter) transactions onunregulated markets, the broker will act as an intermediary between investors
and the various eligible counterparties to your transactions, also sometimes
called a liquidity provider.
Although in their early days brokers allowed their clientsto place orders over the phone, today almost all brokers offer a web interface
or software called a "trading platform" that allows traders to place
orders directly and instantly stock market orders from a computer or mobile
phone.
What Are TheDifferent Types Of Brokers And How Do They Work?
There Are Many Types Of Brokers.
Some are highly specialized in specific markets. Sinceeverything is traded on the stock exchange, there are, for example, brokers
specializing in trading agricultural commodities (beef, orange juice, wheat,
etc.) or even brokers specializing in energy trading (gas, oil ,
electricity) .
We will focus here on the main categories of brokers,namely: Futures brokers, Equity brokers and CFD brokers.
Futures Brokers
Futures brokers are brokers specializing intrading on futures contracts, which notably allow the trading of commodities,
indices and currencies. The futures contract being a financial product
listed on the Stock Exchange and standardized, there will be no major differences
in operation from one broker to another.
The main differences will be pricing and will concern thefunctionalities of the platform made available. The required margins may
also differ from one Stock Broker to another.
There is not much else to add other than that futurescontracts are aimed at sophisticated traders due to the risks that are involved
and the quite high amounts required for traders.
Stock Brokers
The vast majority of stock brokers will give you access tothe main world stock exchanges with an identical mode of operation from one
broker to another, as is the case with Futures brokers... There are however
some brokers who will operate differently by executing their clients' orders on
alternative financial markets.
Stock brokers that operate on alternative financial markets(also known as MTF or Dark Pool) will have particularities that it will be
important for an investor to take into account when choosing his broker.
What you need to remember about this is that on globalexchanges you will usually be able to get good buying and selling prices
provided you pay commissions, whereas with alternative financial exchanges
there is no there is usually no brokerage commission, but the prices are
usually worse.
CFD Brokers
CFDs are leveraged derivative products that allow you totrade on almost all assets and global financial markets. The particularity
being that CFD transactions are executed over-the-counter and that the mode of
operation on CFDs can differ greatly from one broker to another.
The subject is so complex that it could be the subject ofseveral articles on its own, so we are going to summarize and simplify things
today by explaining to you the two main modes of operation of CFD brokers. On
the one hand, we have the brokers who are often defined as "Market
Maker". This type of stockbroker will take the counterparty of its
clients' transactions and manage the risk by opting either for risk coverage or
to keep the risk internally.
This type of broker can offer fixed spreads or guaranteedexecution orders. Funding costs for positions held for several days are
generally lower with this type of intermediary, while spreads are generally
larger. On the other hand, there are brokers of the STP type (Straight through
Processing or “direct processing” in French).
This type of CFD broker will not take counterparty from itsclients, but will automatically forward trading orders from its clients to
third-party counterparties. Spreads are generally not fixed, but although
variable, they will be tighter.
Orders may experience slippage if the transaction amount istoo high. With an STP broker, funding fees are more expensive than with a
market maker.
