So, one of the things that trips up a lot of people when they're just starting out is what broker to get. Lemme help guide you through this decision with another quick article.
So first question;
Who or what is a Broker?
In simple terms, a broker is a person (or more than likely a company) that does the actual buying and selling of your shares. You'll hear them referred to as brokers, houses, brokerage houses at various times, but the meaning is the same, the person/company that actually buys your investments for you.
They act on your instructions, so they're pretty much middle men for you. This is important to note, you don't actually buy or sell shares, your broker does, on your instructions. They also collect the fees and taxes for the government and the stock exchange. Now how much they do for you with regards to investing is dependent on the kind of instructions you give them, so for example, if you sign up for a managed portfolio then your broker controls and buys and sells based on what he/she thinks is best in terms of making gains for you. Its common knowledge that I don't subscribe to nor like nor encourage anyone to ever get a "managed portfolio". Its the last of the options, only good for if you really just want some trading benefits but really don't care about your money too much. In my book a managed portfolio is 1 rung above Bonds and Fixed Assets, and 2 rungs above a Savings Account, which is easily the worst place you can put your money. Note, this is my personal opinion, and you should expect to hear disagreement from pretty much every investment professional (who might I point out, are usually brokers...). You can make OK gains with a managed portfolio, so its not all bad, but you can make so much more on your own with just a little effort. So, now you know the basic version of what a broker does, take a look at this list of brokers from the Jamaica Stock Exchange. That's who you have to pick from in terms of companies with JSE approved brokerage licenses.
How Do They Make Money?
So, how does a broker make money? Simple, they charge a fee…or I should say fees. They also call them commissions, but for the sake of simplicity I'll just group everything under 'fees', which I define as "extra money I pay to get access to the thing I paid for initially". The more fees they charge, the more money they make. One common fee (for equity accounts) is a per trade fee (or commission). You instruct your broker to buy 1000, LASM shares, and ask how much money they'll need to do that and they're gonna tell you X (the price of the LASM shares) plus Y (a brokerage fee, which is usually a percentage of the overall cost of the LASM shares). Now I'm on record as not being a fan of fees of any type, but they are unavoidable, so in cases where fees are unavoidable, you should look to get the most value for the lowest cost. Some brokers also charge whats called a 'settlement fee', which in my opinion, is a fee designed to bring the broker more money than the commission brings in. I don't subscribe to settlement fees at all (I'm looking at you Sagicor), not unless some other charge is waived.
So, What Do I Look For?
OK, so you understand what a broker is, and a basic version of how they make money, so that leaves the 1st question and this article's title unanswered. What should you look for in a broker?
Picking a broker is a lot like picking a cellphone. You want the best features, at the best price. Now remember what I said earlier, you tell your broker what to do, so you want a broker that takes instructions via as many routes as possible. When I say "you instruct your broker" it sounds like you actually call and tell them or maybe email and the truth is, in some cases, that's actually what happens. We have to accept however, that its the 21st century and if we have reusable rockets and electric cars we shouldn't have to dial up your broker (or email them) in order to tell him/her to buy some shares for you. So you want a broker that has some sort of platform to allow you to submit buy/sell instructions and view your portfolio.
For many years JMMB was the only broker that had such a platform. It’s still active and called Moneyline. It's an OK platform, but its effectiveness, speed and trustworthiness are questionable, making it second best at this time. Fee-wise JMMB also only charges 2% per trade which is one of the industry's lowest fees and they do not charge a settlement fee, which is key, because this price point is my personal watermark in terms of brokerage fees, anything above that requires justifying. Anyway, as I said, JMMB is good, but not great and they have lots of room for improvement as they've been surpassed by the Jamaica Stock Exchange's offering. The JSE has stepped up to the plate and provided a brokerage platform, named JTrader, which any brokerage house can sign on to and allow their clients to use. Currently, only a few brokers use it but if I were recommending a broker now, it would be one of the few who do use it. Its a fully capable system which allows you to buy and sell stocks using money you've paid over to your broker. The brokers currently using it are;
M/VL Stock Brokers
VM Wealth Management
NCB Capital Markets
My personal pick of that lot is [EDITED: I used to have VM here, however I no longer think they provide adequate service and I've had to field too many complaints about them so I am editing this line. I can't recommend VM in good faith. I would instead tell everyone to pick a broker based on the reasons given, make sure that the features are great (JTrader), the fees need to be market level or lower, and the customer service needs to be fast, efficient and accurate] since all the traders using the platform would have the same features in terms of trading, but VM has acceptable (to me) fees of around 2% per trade. Special mention goes out to Mayberry who have revamped their website and now also offer an app.
Now I'm not sure if you can actually trade from the app, because I cant get the damned thing to login, but even if you cant, its good to see brokerage houses going in this direction. Update: Mayberry's app now allows you to trade. They still have some kinks being worked out, but it's now, in my opinion, better than the only other platform I know of, JMMB's Moneyline. Mayberry is a good example of what else to look for in a broker because they are not the cheapest, fee-wise, however they offer great additional features; margin accounts, lots of investment products, both local and overseas and preferential shares for their clients whenever they broker an IPO (this isn't a guarantee, but they have done it enough times for it to be expected).
See, while I have the guide as "look for low fees and good tech" those are my rules of thumb, not hard and fast laws. If you find a broker you like, and are comfortable with, then ultimately that's whats important and you should go with them, because at the end of the day, the performance of the investments you pick is whats going to be important, not the broker you bought them through.
So a quick summary of everything I'd like you to take away from this article.
Who is a Broker? A broker is a person that trades securities (shares) on your behalf and pays over all fees and taxes for you.
How do they make money? They make money by charging you fees to trade on your behalf. Some charge simple flat fees, others have multiple fees (trading commission+settlement fees etc)
Whats the best broker to go with? The one that gives you the most features for the lowest price and you're most comfortable with. Find the feature/fee balancing point you're comfortable with and get trading.
Hope my points today were clear, if they weren't, let me know on Twitter @RTRowe, if they were great and actually helped, let me know there also, but more importantly, share this article with someone and let them get in on the Gains Train too! Also be sure to follow this site so you know when new articles are posted. Updates can be found at @EveryMickle.
See you next time.