Photo: Google Image
There are five types of broker businesses you should understand:
Online Stock brokers
Online stockbrokers are homepages where you can buy and sell stocks. If you want to start to invest or trade, start here. As you get more experienced, you might want to do something fancier than stocks. Some brokers will be able to accommodate your needs, some not.
If you purchase a stock at an online broker, the stock will be yours. This sounds self-explanatory but stay with us. This is the biggest difference compared to a betting broker.
Why is this important?
If you own the stock of a company you have several rights as a shareholder. One of the most important is that you can receive a cash dividend that enhances the return of your investment. This is not the case for spread betting.
The ‘online stock brokers’ name is misleading because we are defining a broker type based on traded product (e.g. stocks). Does this mean stockbrokers only trade stock? Not necessarily. Most likely they trade other products too (ETF, bond, funds, etc). However, all brokers trading more complicated products (ETFs, bonds, funds, etc.) almost always trade stocks as well. Let’s stick with this name for simplicity.
Live brokers are guys sitting at the other end of the phone waiting for your orders. Or calling you. They can help you a ton, but it is very hard to find a good one. What’s more, they usually cost more than what they worth.
The advantages of live brokers are that they can:
These are good stuff indeed, but as you can imagine this costs money. There is also this widely held critique that since brokers get their commission from trades, brokers only want to make the most trades irrespective of the client's interest. Of course, this vastly depends on the quality of the broker and the brokerage firm.
Betting brokers are also online broker platforms. You can bet on whether asset prices will go up or down without buying the stock. It is just a bet. Betting brokers are like knives. Could be useful, but if no idea how to use it, you can cut yourself.
Imagine them as bookies with whom you can bet on price movements without owning the security. Let’s say you want to profit from Microsoft stock price is going up. At an online stockbroker, you buy the Microsoft stock. At a betting broker, you bet with your broker whether Microsoft stock will go up or down.
Why on earth is this good for you? There are two advantages. Firstly, you can make bets on all kinds of products. E.g. if you want to trade with let’s say Turkish stocks, you will be able to. This might not be possible with an online stockbroker. The other advantage is leverage. You can make a larger bet with the same amount of money.
The two most common types of betting brokers are spread betting, contract for differences (CFDs), and certificates. If you see these expressions, that is a betting broker service. An important point to remember is if a broker offers you that you can reach a particular market check if it is ‘real’ market access or just the possibility to make a bet.
As you have rightly guessed FX brokers mean, you can trade currencies. The simplest way to trade currency is changing your money to another currency. However, the majority of FX brokers are like betting brokers. You do not convert your money but make a bet. E.g. you will make a bet whether the EUR/USD rate will go up or down. If a broker provides FX trading this is what they mean.
You might be wondering why FX brokers are a separate broker type. Aren’t they just a betting broker specializing in FX? Practically they are. Their advantages are also the same. A) You can reach a wide range of currencies and B) you can trade with leverage. Good thinking.
Just as betting brokers FX brokers are also a diverse bunch coming in all shapes and sizes. Some are sensible, and some allow you to make bets 400 times the money you own (do not even ask). Some are holding your bet, some pair with you with another person.
Binary option brokers
It is not an overstatement that you should stay away from binary options brokers. Binary options are derivatives easy to explain but hard to trade. Here it is how it goes. Let’s say you buy a binary option. You pay me 50 USD. If the S&P100 goes above 2000 points until the end of the month of the month, I give you 100 USD. If it stays below 2000, you get nothing. Simple, right? The catch is you might have an opinion on whether 50 USD is a lot or not, but there is a formula to count it based on probabilities. Most people have misleading feelings and will pay too much for the option.
Reprinted from Brokerchooser, the copyright all reserved by the original author.