To gain access to stock trading, a novice investor should find an intermediary – a broker. We’ll tell you what functions they perform and how to choose them.
What is a broker?
You cannot come to the stock market and start trading independently. You will need the services of a broker – a financial organization with a special license. It acts as an intermediary between an investor and an issuer – the company whose securities you want to buy. The broker has the right to carry out such transactions in the interests of its client.
The broker is also a tax agent: in most cases, the investor does not need to declare the income received. The broker withholds and transfers taxes on profits from transactions to the state.
How to interact with a broker?
First, you sign a contract for brokerage and depository services. These two types of services are mandatory and go together.
To get started, you need to top up your account. You can open a brokerage or individual investment account (IIA). The IIA differs from a brokerage account in its restrictions and tax deductions. You should open an IIA if you plan to invest for at least three years – this will allow you to save on taxes. When you open an IIA, some brokers also open a brokerage account.
You are now ready to trade on the stock exchange by instructing your broker to buy or sell securities. There are different ways to work on the stock exchange. You can completely trust the manager or take responsibility for the transactions entirely on yourself. In any case, the broker operates in the stock market according to your instructions.
How to choose a broker?
Unlike private bank deposits, there is no insurance for your brokerage account. So, if a broker loses its license and is declared bankrupt, you may lose your savings. Therefore, you need to be especially careful when choosing a broker.
To get started, you should clarify the following:
- Whether the broker has a license;
- Financial indicators;
- Reviews;
- Risk communication;
- Terms of the brokerage’s service;
- Availability of training.
To understand how investing in stock markets works, brokerage companies offer training to become a broker. These seminars allow you to learn more about all the details of the brokerage’s activities.
Be sure to ask whether you need to install special software – a trading terminal. If yes, you should study the system requirements to understand whether you can install it on your computer.
All brokers charge a commission for their services. The exchange also takes a percentage for conducting transactions – check whether it is part of the commission specified by the broker or if you should pay on top of it.
You can withdraw profits from transactions to your bank account. There may also be a fee for this. You may also face other unforeseen expenses – for example, increased taxes when investing in foreign securities. However, the broker is required to warn you about the costs of the transaction before executing it.