How do I choose a broker?

The fourth article in The Motley Fool's Millennial Investor Series explores how a stockbroker works, and what to look out for when you're ready to find a broker of your own.

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Our Millennial Investor Series focuses on helping the younger generation understand the basic principles of money management and support them in achieving their financial goals.

So you have some savings set aside and you have decided to take the leap on your share investing journey. But how do you start?

Well, first you will need to find a stockbroker. This is a far less daunting process than you might think, so stick with me – all it takes is a couple of minutes of your time to set up.

What does a stockbroker do?

A stockbroker is someone who executes the buy and sell orders on behalf of their clients. Traditionally these were professionals who would stand on the trading floor with a piece of paper yelling out "Buy!" or "Sell!"

Of course, there are still traditional full service stockbrokers around today – though their processes have changed significantly over time. They can still provide an essential service for their customers through in-depth analysis and advice. This can be helpful for investors who are not willing or able to put in any time to research themselves. These stockbrokers, however, can cost an 'arm and a leg' and often have incentives that aren't aligned with the best interests of their clients. 

For example, some stockbrokers charge high per-trade brokerage fees. This incentivises the stockbroker to make a higher number of trades, rather than offering the best possible advice to maximise investor return or reduce risk.

Therefore, if you decide to use a full service stockbroker, it's important to make sure their incentives are aligned with your own. You should also ensure that the high brokerage costs and other fees you incur are more than compensated by strong investment returns. 

Online brokers

There is, however, a much simpler, more cost effective way to buy and sell shares – via an online broker. Online brokers allow you to make a trade with a couple of clicks on your phone or laptop. There are many online brokerage options, but we recommend you find one with the following features: 

  • responsive customer service capabilities
  • a user-friendly website
  • decent reporting and a linked bank account for your investment funds 
  • CHESS sponsorship – CHESS sponsorship means when you buy shares, the ASX records them as being owned in your name. Some brokers hold them on their own account and this could place your investments at risk if the broker was to go bankrupt. 

I use ANZ Share Investing – a decision based more on convenience than anything else. I already had other accounts with ANZ, so for me it was the most convenient option. The website is easy to navigate and the brokerage cost is not extreme at around $20 a trade. You could definitely find cheaper alternatives out there – many of my colleagues and friends use Commsec and are happy with the service. Commsec charges brokerage fees of only $10 for trades under $1,000.

The cost of brokerage is important as you do not want too much of your potential returns chewed up by fees. Our general suggestion is to avoid paying brokerage of more than 1.5% on any given trade. In other words, if brokerage costs $15 then make each of your purchases in lots no smaller than $1,000 each.

We certainly have an abundance of choice when it comes to a broker and each of us will have to make our own decisions based on which one suits us best. If you know you will struggle to make a decision amidst so much choice, then perhaps try Commsec, ANZ Share Investing or another online broker linked with one of the big banks. 

Once you take the few minutes required to set up your brokerage account and you have deposited your investible savings, then you can start making your first investment. 

A note from the writer

Hi everyone. I am Chris Copley, an analyst at The Motley Fool, providing research on Motley Fool Dividend Investor, Hidden Gems and Everlasting Income.

At The Motley Fool we are receiving more and more requests to provide support for Millennial Investors. As a Millennial Investor myself, helping younger investors is something I am very passionate about and strongly believe that with the right support and education we as Millennials have a prodigious opportunity to achieve our financial goals at an enviable age.

Each week I will release a new topic on investing principles A–Z and provide younger investors with all the basic tools they need to thrive in an ever complicated financial world. 

So follow along with me on your investment journey.

For new investors we suggest that you start from the beginning. You can follow along from our previous articles by following these links…

Here's what every millennial should know about getting started investing in the stock market

Why it's important for millennial investors to define their goals

Defining share markets and long-term investing for millennials

Motley Fool contributor Christopher Copley has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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