7 Things You Need to Know About Buying Stocks Online Your Broker Won’t Tell You

Here are 7 things that are critically important about trading or investing online using a retail broker:

1. All brokers are required to adhere to specific rules and regulations. One of those rules that will affect you at some point is the Compliance Officer that is resident in the brokerage firm. This person is a “police officer” so to speak who makes sure that the broker is performing and acting in compliance to all the rules and regulations of the SEC and the US stock market or other markets. Compliance Officers are your best friend if you discover that you have had a “bad fill” or an “out of the National Best Bid Offer” price.

If you find that your order was improperly filled or not executed per your order specifications, you must contact the Compliance Officer within 24 hours, the sooner the better and report your claim. You must also have a record aka a printed copy of your order, in order to prove what you entered and show why the order execution is not compliant with the regulations. That means each time you enter an order be sure to print off a copy and keep it in your files. These out of NBBO orders are not common but when and if they occur, you need to know to take immediate action. If the order was filled improperly then the order will be reversed, and you will have your capital back and be out of the stock.

2. Online Brokers are a highly competitive oligopoly right now with only a few competing for the individual investor and trader revenues with their products and services. Therefore some are offering to give a new customer money or other offers, but be wary of these brokers. Remember that they are in the business of making money from fees, charges for transactions, and order processing.

If they are paying you to sign up with them, consider how they are going to get all that money back AND make a profit. Most of the time they do this by charging higher fees or by slippage. Slippage is the difference between the bid and the ask. Normally this is very small, a few pennies nowadays but some brokers take advantage of slippage constantly and over time this can cost you a lot of money. There also may be hidden fees and charges. The broker is in business to make money, so giving you money makes no sense unless they can get that money back and then some quickly.

3. Broker competition has created an increasing complexity to online order processing. If you are not a Day trader then all you need is a simple order screen with bracketed order capability, where you can place a controlled order to keep you from getting filled on a gap or fast running stock.

In addition online broker charting software is inferior and inadequate for most individual investors and traders. Having all of your trading tools with one vendor is not a good idea. Having a separate charting software that is complete is better. The reason is because a Charting Software company is doing one thing, which is designing the best charting software for specific trading styles. This means it will have the tools and resources that are not available in the basic, canned charting offered by brokers.

4. Never use an “At Market Order” except if you need to sell out of a stock quickly. Never use a simple “Limit Order.” The reason is that online brokers are registered and licensed to sell you stocks or whatever instrument you are trading or investing in. Stock Broker means Stock Salesman. Always view your broker in the same way you would approach a car salesperson, a realtor, or any other professional sales person. They are selling stocks instead of something else.

As a sales company for stocks, they are permitted to buy stocks at a much lower price and then turn around and sell those stocks to you as the price goes up. “At Market” means that you are being filled at what ever price the stock is currently being offered at, which could be much higher than you expect if the stock is running and particularly in the early morning as the markets open and High Frequency Trading Firms automated trigger orders cause major gap ups.

Even worse than that are “Limit Orders” when brokers make a huge amount of money as a stock is falling and you buy into that stock. So now you are in a stock that is moving down and could potentially fall a lot more. These two types of orders make brokers a lot of profits. These two types of orders cause most of the losses for individual traders.

5. Day trading is a trading style that makes some brokers a lot of money. However this is not the best nor the most profitable trading style for individual traders. It is not as easy as it sounds and in fact over the past decade with the new decimal system for the bid/ask and High Frequency Trading, day trading has become even more difficult to learn and far more challenging to make money. Online brokers encourage day trading because they make a huge amount of money when individual traders trade frequently.

The more orders entered, the more profits the broker makes. Their “training courses” are not written by certified experts, but are targeted to keep you trading more often. A reputable day trading broker will require a significantly higher capital base because you will be using margin most of the time. The reputable broker will require that you pass an exam before they will allow you to day trade. The goal of trading should be for you to make good profits, and not give all your hard earned money to an online broker.

6. Full Service Broker versus Discount Brokers. Full service brokers offer advice and have staff to help you learn how to place an order in their online trading system. Discount brokers do not have staff on hand to assist you. You must figure out the online trading system and order processing on your own. Full service cost are much higher as they have people there to help you and answer questions. The Discount brokers that you should avoid are the ones that are too cheap. In the stock market you get what you pay for. Everything costs money including data feeds, fundamentals, research, and analysis reports. At some point those costs are passed on to customers.

7. The goal of the online broker is to make their firm a huge amount of money from selling their products and services. It is not to help you be profitable or successful. Never think that they are your best friend because they are business people, and you must keep that perspective. They will not offer you something for free unless they are going to make a huge amount of money from you.

Make sure that your broker is a member and insured by the SPIC which is the brokerage account version of the FDIC. Ask around about other individual investor and trader experiences with different brokers. Most brokers have nearly identical products and services so what really matters is how well your orders are executed, the amount of slippage, the response to your questions or concerns, support, and compliance. Be sure and do your homework before ever signing up with any online broker.