Choosing a broker with whom to trade is a critical choice.

We’ll look at what we believe are the most important factors to consider in this chapter. There are five areas in which you should make no mistakes. Following that, there are a few ‘good to have’ features. These are the same factors we take into account in our in-depth evaluations.

Unfortunately, a lot of things are difficult to find out without first joining up.

What is the quality of customer service?
Is your deposit quickly refunded to your account?
Is their programme buggy or crashes frequently?
You just don’t know a lot of this stuff unless you attempt it.
Which is why we have our recommended partner broker at the end of this post for you to sign up with if you wish to do so.

Regulation

This is the first item to look into.

You wouldn’t put your money in a savings account with a bank that isn’t properly regulated. You should also never deposit a substantial chunk of money with an unregulated broker.

You are protected by being in a top-tier regulatory jurisdiction. Brokers are subject to more rigorous regulations in certain jurisdictions.

They may, for example, mandate that client funds (i.e., your deposits) be in separate accounts and not utilised for operational purposes. Also their advertising must be truthful and non-misleading. Also your trades will not be manipulated and subjected to stop hunts or being unable to close trades when they are profitable.

The top-tier regulators that you’d like to see are:

• UK – FCA
• US – NFA, CFTC, SEC
• Australia – ASIC
• Japan – JFSA
• Germany – BaFIN
• Canada – IIROC

Seeing that a broker is regulated by one of these is a very reassuring first step.

Other reasonable regulators include:

• Swiss – SFBC
• NZ – FMA
• Israel – ISA
• Hong Kong – SFC
• South Africa – FSB
• Cyprus – CySec
• Malta – FSA Malta

These are serious jurisdictions, however in some cases they are clearly more relaxed than the top-tier names. For example, CySec has been criticised many times for being too lax with the huge number of brokerages that base themselves in Cyprus.

Then we have offshore locations:

• Belize – IFSC
• BVI – FSC
• St Vincent & Grenadines – SVG GSA
• Vanuatu – VFSC
• Seychelles – SFSA
• Mauritius – FSC
• Domenica – FSU

I would question whether the level of consumer protection you enjoy is comparable in these places. Why exactly has the broker chosen to be regulated offshore and is that in your interests? In general I would stick with brokers that are regulated by a top-tier jurisdiction. There’s plenty of choice in that group. Why take the risk?

Many brokers have multiple entities and licenses. For example they may offer CySec and FCA. Always sign up with the entity that has the most stringent regulator so you get the maximum protection. If you ever have issues with the broker down the line, you’ll be pleased you did.

Company history

Just choosing a well regulated broker is not enough. You need to do a bit of research on the company.

How long has it been around? What is the management team like? Does it have a public annual report? If so, do the strategy and balance sheet look fine? Is there any adverse news?

For example, a company that has an audited annual report and trades on a stock market is likely to have a lot of scrutiny and a competent management team.

Trading with them is likely to be a better experience than a bucket shop of three people with a fancy website but working out of an apartment in Belize.

Each company is different but looking at the calibre of the management team and the length of time the firm has been in business should give you a fair idea. If they have audited public reporting, you’ll get an even clearer picture of what the firm is like.

Customer reviews

Well, naturally reading what other customers have written is super helpful.

You need to apply some caution here, however. Reviews tend to be a bit skewed towards unhappy customers. For example, imagine you read reviews on a mobile phone company:

• No one bothers to fill out a review on Vodafone when stuff works.
• They only fill it out when there’s a service issue and they’re annoyed with the customer service.
• So you get negative skewed results.
• The majority of “reasonably happy” customers never bother to fill out a review … but a minority of “angry broadband warriors” write one as a form of complaint.

It is the same with brokers. So absolutely take on board what people have said but know that you are more likely to be reading unhappy customers than happy ones.

Demo

All decent brokers should offer a demo.

A good broker will offer a demo that takes seconds from sign up to entry. There’s no KYC required for paper-trading so why make it hard?

A great demo will work exactly the same as the real trading system. That means you are totally familiar with how everything works before you risk any real money. That also means that they use the same prices in demo as they do real-life trading so conditions are the same.

A superb demo will let you specify your account balance. Most do not. This is crucial.

The problem with demo trading is that you are not making or losing real money. Therefore you will not have the same emotional reaction. Just lost £2,000 on a trade? Whatever. Let’s go again! In real life it won’t feel so easy.

Giving you a starting balance of £100,000 if you would in real life deposit £2,000 gets you used to trading sizes that would bankrupt you if you did it in real life. It is like playing with Monopoly money. Far better than you set the demo to £2,000 and experience what it would really be like. If you lose £2,000 that’s it – game over! Very different to being at £98,000.

Key points