Broker Basics

Summary

• What are Brokers?

  • Brokers Before Computers

  • Pros and Cons and Fees and Comissions

  • Monitoring Investments

• Cash Movements

Welcome, fellow rookie investors!

Last week, we talked about what ETFs are, and why they're a great starting point for beginner investors. Today, we're shifting gears to focus on brokers.

What are Brokers?

Brokers are like the middlemen in the world of investing. Without them, investing in the stock market wouldn't be as simple because stocks cannot be bought just like that on the internet. Brokers are the ones who help you buy and sell stocks, ETFs, and other investments. They handle all the technical stuff for you, like executing your trades and keeping track of your investments. In simple terms, brokers make investing easy and accessible for everyone.

Some of their functions are to provide information about a certain stock or commodity, execute trades, and most importantly, providing custodial services.

Brokers Before Computers

In today's world, we've gotten used to computer-generated graphs, which update automatically with the latest data and facilitate swift trading. We often overlook the difficult process of hand-drawn stock graphs, which used to be how it was done before computers existed.

Before the 1960s, tracking stock prices involved manual documentation of each price change on the exchange. For instance, if a stock increased by a dollar, traders had to record the time and the price increase. Gradually, these records were compiled to create stock charts, providing valuable insights for trading decisions.

In the past, a buyer would announce their intent by shouting, "I am selling 100 shares of X company at $32," while others would record this sell order in their personal notebooks. Similarly, another person would say, "I am buying 100 shares of company X at $31.50," and everyone would make note of this bid. This process, known as open outcry, was the predominant method of stock trading until the 1990s and was replicated across thousands of companies listed on an exchange.

Starting in the late 1980s, major exchanges worldwide transitioned to electronic trading, with all major exchanges completing this transition by 2017, except for one - the Chicago Board of Trade's exchange, which still employs open outcry trading to this day. Open outcry trading is now primarily used for securing favorable pricing on complex investing strategies related to futures contracts, a practice typically reserved for institutional investors and hedge funds.

Source: Chrono Historia

Pros and Cons and Fees and Comissions

Brokers nowadays have streamlined the investment process, making it incredibly easy for anyone to get started. The only requirements typically include being 18 years of age or older, passing a KYC (know your customer) verification, and providing a valid ID. This whole process usually takes less than 10 minutes, streamlining the whole process a lot.

However, it's crucial to be aware of the different pros and cons, as well as the commissions and fees associated with each broker. While most brokers offer the same basic functions required for investing, some stand out from their competitors by providing additional services, perks, or extremely low fees. So, it's worth taking the time to research and compare options before making a decision.

Some aspects to keep in mind are:

• Commissions and Fees: Some brokers may apply charges for various aspects such as making trades, account maintenance, or the necessity to have a minimum amount invested in your account to keep it active. It's essential to understand the fee structure to ensure that it aligns with your investment strategy and goals.

• Portfolio Transfer: Some brokers offer the possibility to transfer your portfolio of positions to another broker. This is a significant advantage because if the investor decides to move their positions to another broker in the future, having this option is essential. However, not all providers offer this service, so it's crucial to conduct proper research before deciding on a specific broker.

• Earning Interest on Cash: Some brokers offer interest on uninvested cash, which can be advantageous for investors. This feature allows cash held in the brokerage account to earn interest, even while awaiting investment opportunities. For example, if a certain position's price is too high and the investor prefers to wait a few days to see if the stock's price lowers, their cash can still be earning interest simply by being held in the broker's account.

• User-friendly Interface: It's crucial to use a user-friendly broker, as this can make a significant difference in the investing experience. By having an easy-to-navigate platform, the investor can focus solely on investing, while a cluttered interface can sometimes add unnecessary stress. Personally, I've opened around 10 different accounts with different brokers, and let me tell you, I've only invested in 2 or 3 of them. Those were the easiest and simplest ones to navigate, making the investment process smoother and more enjoyable.

• Protection of Funds: It's super important to carefully read how the broker protects the investor's funds. In the event of unforeseen circumstances, such as broker insolvency or fraud, knowing how much your funds are protected and where to claim them is crucial. Understanding the broker's investor protection measures can provide peace of mind and safeguard your investments.

Monitoring Investments

Monitoring your investments is crucial. Using various brokers for different types of investments can make it tricky to keep track of the amount of money invested, dividends received, overall stock performance, and more. One recommendation is to utilize a Dividend Tracker, which aggregates information from your different brokers into one platform, providing a clear overall view of your investments.

These platforms typically offer different methods to connect your brokers. You can manually input transaction details such as the stock ticker, amount of shares purchased, average price, purchase date, and any associated fees. Alternatively, some brokers offer automatic transaction connections, providing real-time updates. With this option, when you buy or sell a position on your broker, the tracker automatically updates.

Choosing between manual or automatic updates is a personal preference. Personally, I opt for automatic updates because I trust the provider and have conducted thorough due diligence on them. This ensures that I can efficiently monitor my investments without the hassle of manual input.

Overall, it's incredibly important to have a clear vision of where you are investing your money, how you are doing it, the tools you are using, and how to track everything. By having an overall view of your investments, tracking your progress becomes much easier. Understanding the topics we have discussed prepares us for our financial journey ahead. With this knowledge and clarity, we can navigate the world of investing with confidence and make informed decisions about our financial future.

Next week, we'll look into Buying your first share. We'll walk through a step-by-step process, making sure that we don’t overlook any detail and explaining how the process works. While each broker may vary slightly, the overall process remains very similar. So, whether you're using one broker or another, you'll have a clear understanding of how to take that exciting first step into investing. So, keep smiling, keep learning, and I'll catch you next time!

Trevor

Disclaimer: This post is NOT financial advice. It is intended for educational purposes only. Investing involves risks, and there is a possibility of losing capital. Always conduct thorough research and consider consulting with a financial advisor before making any investment decisions. Your financial well-being is important, so please invest responsibly.

Cash Movements

• 46€ to a Savings Account with a 4% interest on cash, paid monthly (total balance of 305,96€)

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