How to Choose the Best Broker According To His Trading Strategy?

One of the questions that often comes up from retail traders 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 Stock Trading strategies since a stock broker may be perfectly suited for a certain 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 in one 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), the broker 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 on unregulated 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 clients to 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 The Different Types Of Brokers And How Do They Work?

There Are Many Types Of Brokers.

Some are highly specialized in specific markets. Since everything 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 in trading 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 the functionalities 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 futures contracts 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 to the 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 global exchanges 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 to trade 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 of several 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 guaranteed execution 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 its clients, 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 is too high. With an STP broker, funding fees are more expensive than with a market maker.

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