If you're a regular MoneyWeek reader, you probably already have a stockbroking account but it may not be the best choice if you're considering becoming an active trader.
Different brokers cater to different types of client. The ideal firm for a pension account where you trade maybe ten times a year will often not be suitable for a trading account where you will hit that figure every month, week or even daily.
There are several things to consider when picking a broker. We've listed some of the most crucial in the box below. But something that even experienced traders may never have considered is exactly how your trades are executed.
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Most of us (understandably) don't pay much attention to what goes on behind the scenes at a broker. But if you plan to be an active trader especially one who looks to profit from relatively small price moves it's worth getting to grips with what happens when you buy or sell.
There are two different execution models used by UK brokers. The first is a quote-driven' system. When you place a trade, your broker gives you a quote, which is good for a certain time period usually 15 seconds. You then decide if you want to accept the price or not. If you don't, the quote lapses.
The price is sourced from a pool of market makers (retail service providers, or RSPs). A market maker is a firm that stands ready to either buy or sell a stock at any time and aims to make a profit from the spread between the bid' price and the offer' price.
Each broker polls a pool of RSPs the quote you get is the best one from any member of that pool. The number of RSPs in each broker's network varies it may be as many as 30 but more RSPs doesn't necessarily mean a better price.
When you place a trade using the RSP model, your trade does not go direct to the London Stock Exchange you're just buying from or selling to the RSP with the best quote. The alternative is direct market access' (DMA), an order-driven' system.
Under DMA, your order is placed onto the exchange's order book and sits there until it's cancelled, or another market participant accepts the price you're quoting. Unlike an RSP trade where you accept a price, DMA lets you offer your own price to the market.
Whether you benefit much from a broker that offers DMA will depend on what kind of securities you trade and how actively you deal.
If you often trade in stocks that have a relatively large spread between the bid and the offer price, the chance to place your order on the order book at a price within the spread could allow you to execute trades at significantly better prices than an RSP would quote (although sadly DMA is not available for many Aim stocks, which often suffer from the widest spreads).
DMA also allows you to place orders during the auctions before trading opens and after it closes, which can sometimes produce attractive trading opportunities.
In some countries, almost all trades are done through DMA, but in the UK it's relatively infrequently used by private investors indeed, only a handful of retail providers offer this service.
This isn't necessarily a bad thing most investors are best suited to long-term investing rather than short-term trading.
But if DMA appeals to you, providers include iDealing, Interactive Brokers, Saxo Capital Marketsand other brokers that use Saxo's infrastructure such as Sucden. The newest entrant is well-known spread betting and CFD provider IG, which launched an equity DMA trading service in September.
Three tips for choosing a broker
The first thing most people look at when choosing a new broker are dealing commissions. These are important, but keep in mind that firms often try to look cheap by advertising low dealing fees and pumping up less-obvious charges. Take account of all costs, including currency conversion rates, if you plan to deal in stocks that are not priced in sterling.
You must also consider the kind of service you'll get. This includes issues such as the stability of the firm's trading platform: does it have a history of crashing or getting overloaded in periods of turmoil, just when you need it most?
Also check whether it offers the full range of order types you'll need for your trading strategy, and whether the broker trades in securities such as Aim stocks, preference shares and retail bonds if you need these not all do.
Also look into the firm's reputation for customer service issues, such as timely processing of dividends and efficient handling of problems.
It's also important to think about security. Does your broker seem financially solid? Will it still be around in a year's time? But don't just ignore smaller, independent brokers that are properly regulated they often offer a more helpful, flexible and cost-effective service than the big names.
Firms that are authorised and regulated by the Financial Conduct Authority will be members of the Financial Services Compensation Scheme, which pays compensation of up to £50,000 per client if a broker collapses and your shares or money go missing due to fraud or negligence.
And never deal with unregulated brokers or firms that cold-call you with tempting opportunities these are invariably scams.
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