Not all online brokers are the same. There are big differences in the levels of service, regulatory compliance, and costs. So here are some questions to ask your broker before deciding where to place your money.
Are you licensed by the financial market regulator?
This is an important one. For online brokers offering contracts for difference (CFDs), ask if they have an over-the-counter derivatives provider (ODP) licence. CFDs are a type of derivative that allows the trader to benefit from price movements in an underlying asset without owning the asset.
There’s a huge difference between licensed and unlicensed brokers. Those awarded an ODP licence by the Financial Sector Conduct Authority (FSCA) are subject to ongoing monitoring by the regulator, and must have strong governance with independent directors, as well as stringent risk management.
“We spent more than R6 million and thousands of hours to get an ODP licence and we are one of less than a handful in SA – outside of the banking sector – to have this licence,” says Hardus van Pletsen, founder and CEO of QuickTrade.
“The most important benefit of this is that it gives our clients a high degree of comfort to know they are dealing with a broker that is regulated, monitored and adheres to the very strict licensing requirements that come with the licence.”
Does your broker pool require you to deposit your trading funds into a pooled company account?
This is a big no-no. If you are being asked to transfer funds into a pooled company bank account, run a mile.
Those funds can easily get used to pay company expenses, and you may not see them again. Only deal with brokers that insist on your funds being transferred into a segregated trust account. The broker should not be allowed to touch your funds.
Do you have an office in South Africa I can visit?
Having a local physical presence is important. Several brokers are fully online with no local office. If something goes wrong with your account, you may as well be on the moon. Rather choose a broker with a local office you can go to in case you run into difficulties, or just to get a feel for the culture of the company.
What are your costs?
The online broker should publicise their schedule of fees on the website, and those fees should be simple to understand and transparent. Ask the broker if there are any hidden fees.
Brokers make money by charging a spread each time you buy or sell a financial instrument. The spread is the difference between the price you pay depending on whether you are a buyer or a seller. That spread is not fixed. It varies depending on the instrument and the liquidity (how much money is moving into and out of that instrument). The higher the liquidity, the lower the spread.
Do a simple comparison on a forex pair such as the US dollar-euro and on an index such as the Nasdaq. That way you are comparing apples with apples.
Make sure the company does not lump a commission fee on top of this. Bear in mind when trading CFDs that there is a financing charge when a position is held overnight. This charge is about 6% a year in most brokerages, which is small enough to go relatively unnoticed, but be aware that you will find these costs adding up the longer you hold a position.
Watch out for misleading advertising
Does the broker create the impression that online trading is a way to get rich quick, without explaining the risks? Be warned: there are serious risks in online trading, as you are able to purchase financial instruments with leverage – meaning your profit and losses are amplified. You’re effectively buying more financial assets with less capital, which is great when the market moves in your favour, but is extremely stressful when it moves against you.
Go with a broker that does not engage in misleading advertising and properly explains the risks.
Does the broker do a basic check to see if you can afford to invest?
You should not be trading if you cannot afford to lose the money you are trading with. If you are trying to supplement your income with trading, well and good – but only use money that you are prepared to lose.
When you sign up the broker should do a basic appropriateness assessment check to see if you are financially qualified to trade online. Brokers that don’t do this are negligent and you should avoid them.
Are your staff trained?
Very important. Make sure the staff are qualified to provide advice and deliver quality service. They should preferably have passed the RE5 exam under the Financial Advisory and Intermediary Services (Fais) Act.
What training and ongoing support do you offer clients?
Are there simple-to-understand tutorials explaining how to trade, how to read charts, how to set up a trade, and how to understand the fundamental drivers behind price movements in the market?
Is there a support centre where someone can guide you through a proper trade setup? Are there weekly webinars and coaching sessions to help clients?
Is there someone qualified who will keep an eye on your trading, good or bad, and correct you when things go wrong – for example, when you risk too much money in a single trade (a common reason for trader wipeout).
QuickTrade has staff on hand to assist clients from 08:00 to 22:00 seven days a week. Qualified relationship managers keep an eye on clients’ trading performance and will intervene to assist those who clearly need guidance.
Do you have a properly constituted board with independent directors?
This is more important than you might think. Independent directors bring heft and stability to a company. QuickTrade’s board includes non-executive chair Humphrey Borkum, who was formerly chair of the JSE and of Merrill Lynch South Africa. Also on the board as non-executive directors are former chief financial officer at Merrill Lynch South Africa, Sanjay Chiboo, and Sophia Coetzee, former sub-Saharan Africa head of financial crime compliance and regulatory compliance at HSBC.
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