The five types of broker businesses II – Important issues to consider
Hopefully you have already got the first impression about the five types of broker businesses. In order to support your final broker chooser decision let’s break them down further.
Live brokers are guys sitting at the other end of the phone waiting for your orders. Or calling you. The advantages of live brokers are that they can
- make a trade on exotic products
- execute complicated deals
- help you to evaluate a trade idea
- call you if they have a trade idea, or there is something going wrong with your portfolio.
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. Unfortunately, we do not know any good independent homepage rating live brokers, which is a shame. Who knows, maybe this is a future task for Brokerchooser.
Online stockbrokers are online platforms where you buy and sell stocks without live interaction.
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 cash dividend that enhances the return of your investment. This is not the case for spread betting.
The ‘online stockbrokers’ 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.
Imagine betting brokers 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 kind 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. This sounds complex, but don’t worry, we will get back to leverage later.
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. We will go into the differences later, but don't worry about it for now. 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.
Well, we split FX brokers because they are pushing hard to acquire customers. You most likely already come across with an FX broker advertisement. Want to get a yacht in 0.7 seconds? Jennifer already did it with trading Euro! Rings a bell? It is because people usually have views on the Euro or the dollar. Since they think they know, it is easy to convince them to trade currencies. You should know better, and know there are a lot of excellent traders on the currency markets, and it is super hard to make money on FX on the long run.
Just as betting brokers FX brokers are also a diverse bunch coming in all shapes and sizes. Some are sensible, and some allow 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. We will cover FX brokers later. For now, save the info, that if you still stick with currency trading, you will need an FX broker.
Binary option brokers
It is not an overstatement that you should stay away from binary option 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. For now, we recommend you leave out binary option trading type. There are so million more ways to make money.
Brokers are mixes of different broker types
Now you understand the five types of brokers. The next step is to realise that broker types are like business lines in brokerage companies. Imagine a broker is running a live broker business line and online stockbroker business line. Ok, that was easy. Luckily it goes very similarly with the other types as well. E. g. a broker can be busy in FX trading and provide CFDs as a betting broker. Let's see a few real life examples.
- Saxo Bank is one of the best-known brands on the market. It is primarily a betting broker doing CFD trades. Additionally, it is also an FX broker, providing FX trades very similar to specialized FX brokers. None the less, you can also buy major market stocks at Saxo, so it is also an online stockbroker. But not for every market. Let’s say you want to go crazy and trade Hungarian stocks. At Saxo, it is not possible to buy Hungarian stock, but you can make a bet through CFD (e.g. a betting broker service). Clear? Lastly to make it more complicated Saxo can also provide live broker service if you are a platinum member.
- TD Direct Investment is an online stockbroker from Luxemburg. Next to stocks you can buy funds and ETF. If you wanted currencies or betting TD could not provide the service for a while. Recently they introduced FX and CFD. Now they are also a betting and FX broker. (To make it more complicated they introduced Saxo’s service under TD brand).
- IG Broker provided CFD, FX, and Binary options but did not offer online stockbroker services for a long time. As TD broadened its services from online stockbroking to FX and betting broker, IG went the other way around. It entered the online stockbroker market next to providing CFD, FX, and binary.
Sum up questions
- What are the advantages of having a live broker?
- What is the difference between an online stockbroker and a betting broker?
- What are the benefits of a betting broker?
- What are the benefits of owning stocks?
- Which are the two ways to trade currencies? In which type do FX brokers provide service?
- Explain a broker which you know and tell which kind of broker types it covers.
- Which broker type is the best fit for you?
As you can see, this is a big mess, and it is a challenge to distinguish the broker types. However, the five broker types framework helps you navigate in the brokerage world. Probably, at this point, you started to think about whether you can open a foreign broker account. The short answer is yes, but unfortunately, that story is equally complicated. Let’s clear that out as well and check whether you can open a foreign account.