Who is a broker and what does he do?
If you decide to trade on the stock exchange, you have two ways. The first is to trust the manager. This method is suitable for those who do not have the time or desire to invest on their own. The second option is to do everything yourself: develop a strategy for investing money and take responsibility for transactions.
However, just coming to the stock exchange and trading on your own will not work. You will need an intermediary broker between the investor and the issuer, that is, between you and the company whose securities you plan to buy. A broker is a company that has a license to work on the stock market and which has the right to make transactions with securities for an investor.
How to interact with the broker?
Before accepting an order for an operation, the broker is obliged to warn you about the transaction costs — for example, about commissions to the exchange and to the broker himself.
The intermediary should also inform you about the current prices of supply and demand for the selected financial instruments. Some securities may turn out to be illiquid — that is, it will be difficult to find a buyer for them at all.
The broker chooses the way to provide you with data on additional expenses. It could just be a link to his website page. Make sure in advance that the information is clear and you will be able to quickly understand it.
If the broker does not report all the nuances and you suffer losses because of this, you will have the right to demand compensation for losses, including through the court.
There are situations when it is important to make transactions very quickly. Then you can refuse to receive warnings about additional expenses so that the broker will immediately execute your orders. But in this case, it will not be possible to make claims to the intermediary due to losses that will be associated with a lack of information.
How to choose a broker?
It is important to remember that the money in your brokerage account does not fall into the deposit insurance system, unlike bank deposits. Therefore, your task is to find the most reliable broker.
What to study and what to check when choosing a broker:
Make sure that the company name in the registry exactly matches the one that the broker specifies in the contract. It may turn out that the broker offers you to sign a contract with a "partner" foreign company, which has almost the same name. Agreeing to such an offer is very risky. If you sign a contract with a foreign broker and he violates your rights, you will have to defend your interests in the country where he is registered.
What else should I pay attention to when choosing a broker?
If you are going to trade via a smartphone or tablet, check with the broker if this is possible. Check whether this mobile app is suitable for your gadgets and whether it is paid.
It is good if the broker's trading program has a demo mode. You register on the broker's website and receive by mail links to download the trading program and keys (digital protection files) for installation. Install the program and try yourself as an investor without opening an account. You will not trade for real money, but in a test mode, in order to understand without unnecessary risk how exchange trading works.
At the start of an investor's career, until you know the volume and number of transactions, it is difficult to determine all the needs and choose the optimal tariff. Do not look for a broker with the lowest commissions, it is better to focus on a reliable intermediary, and the tariff can be changed if it does not fit.
The contract with the broker is also not a lifetime contract, you can always change the broker if it does not suit you.
What should I do if the broker lost his license?
The cancellation of the license may be followed by the bankruptcy of the broker. And in this case, there is a risk that you will not be able to fully recover your money and securities.
How to act to increase the chances of keeping assets, read in the text "My broker's license was revoked. What to do?".
How to reduce the risk when working with a broker?
Protect your money
As a rule, a broker can use your money to their advantage. If the broker is a bank, then he has the right to do this by law. If the broker is not a bank, then he most often includes a clause in the contract that allows him to transfer your money to his account.
As long as the broker is doing well, there is nothing dangerous about it. He lends your money to other clients for a short time, receives interest for it — and thanks to this he can reduce the fee for his services for you.
But if the broker goes bankrupt, then you may lose some of the money — the law on the securities market does not guarantee the return of funds that are withdrawn from the client account to the broker's account.
Therefore, the main recommendation is not to keep money in a brokerage account for a long time.
Invest them in securities or withdraw them to your bank account. Firstly, interest may accrue on the bank account. And secondly, the money in the accounts and deposits of individuals and individual entrepreneurs is insured by the state. In case of problems with the bank, you automatically get the right to pay insurance compensation.
Another reliable way to protect money is to open a separate (also called segregated) account. And at the same time, write in the contract that you forbid the broker to use your money. If the broker's license is revoked, you will be able to withdraw all the money from your personal account without the slightest delay.
But the fees for servicing a separate account are much higher than for maintaining a common one. They can be so large that your income from risky operations on the stock market may be lower than the interest on virtually risk-free bank deposits.
If you decide to trade on the stock exchange, you have two ways. The first is to trust the manager. This method is suitable for those who do not have the time or desire to invest on their own. The second option is to do everything yourself: develop a strategy for investing money and take responsibility for transactions.
However, just coming to the stock exchange and trading on your own will not work. You will need an intermediary broker between the investor and the issuer, that is, between you and the company whose securities you plan to buy. A broker is a company that has a license to work on the stock market and which has the right to make transactions with securities for an investor.
- Sign a contract with a broker. Study the terms of the brokerage service agreement. As a rule, brokers publish a standard contract with tariffs on their website. If the prices and other conditions suit you, you can sign a contract at the broker's office or send notarized documents by mail. Large banks with a brokerage license often offer to conclude a contract remotely — through a website or mobile application.
- Open an account with a broker and put money on it. After that, the broker will be able to buy securities for you. If you plan to invest in the stock market for more than three years, it is more profitable to open an individual investment account (IC), which will allow you to save on taxes.
- Open an account for securities. The securities you buy must be accounted for somewhere. To do this, you need to open a deposit account in the depository (an account for securities accounting). The depository may be a separate company that is not related to your broker. But often, in addition to the brokerage license, the broker also has a depository license and it combines these two functions.
- Now you are ready to trade on the stock exchange — you can give instructions to the broker to buy and sell securities. This can be done by phone, online — using a special program — a trading terminal or through the broker's mobile application.
- The broker performs operations on the stock market on your behalf. In addition to the money for the purchase of securities, a commission is deducted from the brokerage account — a fee for the fact that the broker helps you to perform these operations.
- With the help of a broker, you can withdraw money to your bank account. They can also charge a commission for this. The broker will calculate and withhold tax on your income.
Before accepting an order for an operation, the broker is obliged to warn you about the transaction costs — for example, about commissions to the exchange and to the broker himself.
The intermediary should also inform you about the current prices of supply and demand for the selected financial instruments. Some securities may turn out to be illiquid — that is, it will be difficult to find a buyer for them at all.
The broker chooses the way to provide you with data on additional expenses. It could just be a link to his website page. Make sure in advance that the information is clear and you will be able to quickly understand it.
If the broker does not report all the nuances and you suffer losses because of this, you will have the right to demand compensation for losses, including through the court.
There are situations when it is important to make transactions very quickly. Then you can refuse to receive warnings about additional expenses so that the broker will immediately execute your orders. But in this case, it will not be possible to make claims to the intermediary due to losses that will be associated with a lack of information.
How to choose a broker?
It is important to remember that the money in your brokerage account does not fall into the deposit insurance system, unlike bank deposits. Therefore, your task is to find the most reliable broker.
What to study and what to check when choosing a broker:
- License
Make sure that the company name in the registry exactly matches the one that the broker specifies in the contract. It may turn out that the broker offers you to sign a contract with a "partner" foreign company, which has almost the same name. Agreeing to such an offer is very risky. If you sign a contract with a foreign broker and he violates your rights, you will have to defend your interests in the country where he is registered.
- Financial indicators
- Reputation
- Risks
- Conditions
What else should I pay attention to when choosing a broker?
- Software
If you are going to trade via a smartphone or tablet, check with the broker if this is possible. Check whether this mobile app is suitable for your gadgets and whether it is paid.
- Voice orders
- Training
It is good if the broker's trading program has a demo mode. You register on the broker's website and receive by mail links to download the trading program and keys (digital protection files) for installation. Install the program and try yourself as an investor without opening an account. You will not trade for real money, but in a test mode, in order to understand without unnecessary risk how exchange trading works.
- Commission
At the start of an investor's career, until you know the volume and number of transactions, it is difficult to determine all the needs and choose the optimal tariff. Do not look for a broker with the lowest commissions, it is better to focus on a reliable intermediary, and the tariff can be changed if it does not fit.
The contract with the broker is also not a lifetime contract, you can always change the broker if it does not suit you.
What should I do if the broker lost his license?
The cancellation of the license may be followed by the bankruptcy of the broker. And in this case, there is a risk that you will not be able to fully recover your money and securities.
How to act to increase the chances of keeping assets, read in the text "My broker's license was revoked. What to do?".
How to reduce the risk when working with a broker?
Protect your money
As a rule, a broker can use your money to their advantage. If the broker is a bank, then he has the right to do this by law. If the broker is not a bank, then he most often includes a clause in the contract that allows him to transfer your money to his account.
As long as the broker is doing well, there is nothing dangerous about it. He lends your money to other clients for a short time, receives interest for it — and thanks to this he can reduce the fee for his services for you.
But if the broker goes bankrupt, then you may lose some of the money — the law on the securities market does not guarantee the return of funds that are withdrawn from the client account to the broker's account.
Therefore, the main recommendation is not to keep money in a brokerage account for a long time.
Invest them in securities or withdraw them to your bank account. Firstly, interest may accrue on the bank account. And secondly, the money in the accounts and deposits of individuals and individual entrepreneurs is insured by the state. In case of problems with the bank, you automatically get the right to pay insurance compensation.
Another reliable way to protect money is to open a separate (also called segregated) account. And at the same time, write in the contract that you forbid the broker to use your money. If the broker's license is revoked, you will be able to withdraw all the money from your personal account without the slightest delay.
But the fees for servicing a separate account are much higher than for maintaining a common one. They can be so large that your income from risky operations on the stock market may be lower than the interest on virtually risk-free bank deposits.
Protect securities
The broker can use your securities if you allow him to do so. Such a clause is often prescribed in the brokerage service agreement. At the same time, the broker is obliged to return the securities at your first request. And if you want to sell them, then he must immediately execute this order and transfer the proceeds from the sale to your account.
But even under such conditions, you are at risk. If the broker borrowed your securities and went bankrupt, there is a high probability that he will not be able to return them.
It is also worth considering that dividends can be paid on shares, and coupon income can be paid on bonds. And when issuing companies compile a list of recipients of such payments, it is important who will be the holder of the securities at that moment. If the broker has the papers at this time, then the broker will be included in the list, not you. As a rule, under the contract, the broker is obliged to transfer the dividends or coupon income to you. But there is a risk that he will not do it.
If you are not ready for these risks, you can not give the broker the right to use your securities. But, most likely, this will increase the cost of brokerage services.
And even if you do not give the broker permission to use your securities, he will still have access to the securities that are on your trading account depot.
Securities are credited to the trading account of the depot when you buy them on the stock exchange, and are debited from it when you sell. You make these transactions through a broker. Therefore, the broker always has the right to send instructions to the depository on crediting and debiting securities that are listed on your trading account of the depot.
Securities that you do not plan to sell yet, you can keep in a regular depot account that is not intended for trading on the stock exchange. At the same time, you have the right not to give the broker permission to dispose of securities on this account.
If you want to sell securities from a regular depot account on the stock exchange, then, as a rule, you will need to give two instructions at once: transfer securities from a regular account to a trading account and sell. And if you decide to buy papers and keep them for a while, you can simultaneously give two instructions - to purchase and transfer these papers to a regular depot account. If you do not plan to actively trade on the stock market, but want to invest in stocks and hold them for at least a couple of years, then you can use another option. You can open a personal account in the register of shareholders maintained by the registrar company. And transfer your securities to this account. The broker does not have access to your personal account without your permission.
But, most likely, you will have to pay an additional fee to the depository for transferring securities to a personal account, as well as to the registrar for opening and servicing such an account. Specify the cost of these services in advance and decide whether you are ready for these expenses. Keep in mind that the registrar may also have his license revoked. And registrars also do not participate in the state deposit insurance system.
Monitor the status of accounts
Investments should not be left unattended. Follow the financial news, periodically request statements about the status of your brokerage accounts and depot accounts.
The broker can use your securities if you allow him to do so. Such a clause is often prescribed in the brokerage service agreement. At the same time, the broker is obliged to return the securities at your first request. And if you want to sell them, then he must immediately execute this order and transfer the proceeds from the sale to your account.
But even under such conditions, you are at risk. If the broker borrowed your securities and went bankrupt, there is a high probability that he will not be able to return them.
It is also worth considering that dividends can be paid on shares, and coupon income can be paid on bonds. And when issuing companies compile a list of recipients of such payments, it is important who will be the holder of the securities at that moment. If the broker has the papers at this time, then the broker will be included in the list, not you. As a rule, under the contract, the broker is obliged to transfer the dividends or coupon income to you. But there is a risk that he will not do it.
If you are not ready for these risks, you can not give the broker the right to use your securities. But, most likely, this will increase the cost of brokerage services.
And even if you do not give the broker permission to use your securities, he will still have access to the securities that are on your trading account depot.
Securities are credited to the trading account of the depot when you buy them on the stock exchange, and are debited from it when you sell. You make these transactions through a broker. Therefore, the broker always has the right to send instructions to the depository on crediting and debiting securities that are listed on your trading account of the depot.
Securities that you do not plan to sell yet, you can keep in a regular depot account that is not intended for trading on the stock exchange. At the same time, you have the right not to give the broker permission to dispose of securities on this account.
If you want to sell securities from a regular depot account on the stock exchange, then, as a rule, you will need to give two instructions at once: transfer securities from a regular account to a trading account and sell. And if you decide to buy papers and keep them for a while, you can simultaneously give two instructions - to purchase and transfer these papers to a regular depot account. If you do not plan to actively trade on the stock market, but want to invest in stocks and hold them for at least a couple of years, then you can use another option. You can open a personal account in the register of shareholders maintained by the registrar company. And transfer your securities to this account. The broker does not have access to your personal account without your permission.
But, most likely, you will have to pay an additional fee to the depository for transferring securities to a personal account, as well as to the registrar for opening and servicing such an account. Specify the cost of these services in advance and decide whether you are ready for these expenses. Keep in mind that the registrar may also have his license revoked. And registrars also do not participate in the state deposit insurance system.
Monitor the status of accounts
Investments should not be left unattended. Follow the financial news, periodically request statements about the status of your brokerage accounts and depot accounts.