7 Questions Australians should ask to pick a safe online broker

If you’re thinking of trading or investing, then the broker you use will go a long way in defining your experience. This is because you cannot access the markets on your own, you need to pass through a broker so you can’t avoid them.

When choosing a broker don’t just go for the one that offers free stuff and a lot of bonuses, you need to look beyond the freebies. Some brokers also promise zero commissions but turn around to charge other kinds of fees just to make up for the commissions.

Scam brokers are also out there and some of them are very elaborate. Once you part with cash, recovering the cash is always difficult so it is better to be safe than sorry.

There are other factors that border on technology, regulation, safety of data and ethics that you also need to consider when picking a broker.

What questions you should ask when selecting a broker

There are 7 questions you should ask to help you conclude that an online broker is safe to do business with. So let’s get right into it.

Q1. Is the broker ASIC regulated?

The Australian Securities and Investments Commission (ASIC), is the financial services and financial market regulator in Australia. As part of their numerous duties, they also grant licenses to all brokers operating in Australia.

When you visit their website www.asic.gov.au do the following:

  • click on “search our registers”
  • click on “professional registers”
  • click on “browse professional registers”
  • select “Australian Financial Services licensee”
  • Type in the license number of the broker which is found on the broker’s website.

For example, eToro broker have an Australian Financial Service License number of 491139 as seen on their website. So, once you input this number, all the details about eToro comes out for your perusal.

Q2. How is the trading app security & privacy policy?

Firstly, App security talks about safety features such as encryption and two factor authentication (2FA). Your brokers trading App should be equipped with 2FA. When you use 2FA, two layers of security are activated. These layers combine: something you know such as your password, and something you have such as a code sent to your mobile phone.

2FA can be activated for logging into your account, or for sensitive transactions such as withdrawals from your trading account. The idea is to keep your account safe. In the event that someone has your password, chances are the person will not have your mobile phone at the same time.

It is also a good idea to do some research on the broker’s history, to find out if they have suffered any data breaches in the past, and what they did about it.

Secondly, a privacy policy tells you how your information is used, shared, how long the information is held, and where your information is stored. You may need to know if your data is stored in servers located in countries with poor privacy laws.

Q3. How is the trading app execution speed?

Your brokers App should have super-fast execution speed. You don’t want to see a loading sign or a please wait sign when you are about to buy or sell an asset. By the time it unfreezes, the prize of the asset may have changed and you will see a re-quote.

However it’s hard to find out execution speed if you have not used the App. Solution is you could download the App and start with a small amount of money, to test out the speed. Alternatively you could also find out from those who currently use the App.

Q4. What are the account specifications?

Firstly, if you are a forex trader, you might intend to trade in certain currency pairs or stock of certain companies. You need to know if your broker provides access to the currency pairs, stocks etc. which you want to trade.

As per this research of 30+ best forex brokers in Australia that offer currency trading & CFDs on different markets, all brokers have different account offerings. For example, some of these forex brokers offer as high as 110 currency pairs, while some offer only 49 currency pairs etc. so you need to know which suits you.

Secondly you need to find out how much leverage the broker offers for each asset class and if that is what you want.

For example, Pepperstone markets offer 10:1 leverage for CFDs on commodities. But you must not choose an unregulated broker to use higher leverage.

In Australia, the ASIC has put restrictions on leverage that CFD brokers can offer to protect retail traders from losses, between 2:1 for CFDs on crypto-assets and 30:1 for forex to traders, depending on the instrument being traded.

Thirdly you need to find out if the broker supports Negative balance protection (NBP). This will ensure that you don’t lose more than your initial capital and begin to owe your broker money.

Similarly, you must check other account features like account types, fees, platforms, charting tools etc.

Q5. Is the trading app interface user-friendly?

A user-friendly app should be available. It should also have easy to read menus, visible and evenly-spaced buttons so you don’t click on the wrong button erroneously.

Charts and indicators should be available and easy to configure in different colors. It should also allow you to copy trade if you are into automated trading.

Push notifications should also be flexible and easy to setup for different events. These events include but are not limited to when Bid/Ask prices change, when a news report is released, take profit, etc. The app should let you direct the alert to your mobile phone or email address.

Q6. How is the customer service?

There is a fiduciary relationship between a broker and a trader. This means that the broker is supposed to place trader’s interest first. So anytime you call on your broker, they should respond to you.

There are going to be times when you need help urgently like when you can’t login to your trading app, when you deposited money but it hasn’t reflected, etc. In times like this you need a swift response from your broker.

Your broker should provide you with more than one channel of communication. Emails, 24 hour live chat, toll free telephone lines etc. should be available. Your broker should also assign a human relationship manager to you, so you can reach out to the person when you have issues.

Response time to email enquiries should be short, phone calls should be responded to on time and lie chats should be responsive. These are all signs that your broker’s customer service is good.

Q7. How much fees will I be paying?

Brokers have different kinds of fees. Some are trading fees such as commission per round turn and some are non-trading fees such as inactivity fees, account maintenance fees etc.

The trading fees are the ones that really bite because they increase with the volume of your transaction.

For instance, round-turn commissions per standard lot for forex trading, IC markets charges $6 with cTrader account while Pepperstone charges $7 while eToro doesn’t charge commissions.

For spread on AUD/USD, XM markets charges 1.8 pips, while eToro offers 1 pip spread on average. So, the point is that fees, spread and commissions vary across brokers so you would need to run a check.

These fees may seem negligible, but when they accumulate they become large. Fees can also affect any profits you may make from trading as we see in the example below:

Example 1

Imagine you are trading with a broker who charges a $7 per round-turn commission and $1 overnight swap fee.

You buy a standard lot (100,000 units) of AUD/USD exchanging at 0.7215 for $72,150. You hope that the exchange rate will appreciate and you make a winning.

Luckily for you after three nights, the exchange rate appreciates to 0.7217 so you sell and make a winning of $20. But don’t forget the charges!

Your broker will deduct $7 commission per round-turn, and a $3 overnight fee (since you held the position for 3 nights). So your actual profit will be $10

This is just an example of how fees and commissions affect your earnings. Before settling for a broker compare fees and commissions.

Choose wisely

Picking a broker can be overwhelming I know. However, you don’t need to be in a hurry so take your time, get a pen and paper and do some comparisons.

Regulation is the first thing to look out for because there are so many scammers out there and most of them will get to you via social media.

You can also try out different regulated brokers to see which one suits you better. Remember to practice with demo trading and start trading with small lots if you are a new broker.

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