Is Your Brokerage Right for You?

If you trade stocks, options and bonds, you have to use a brokerage firm. By and large, these brokerage firms provide a great service, and in most cases they do so at a reasonable cost. But how do you really know if your broker is right for you?

To find out if you and your brokerage firm are a good fit, you need to ask yourself a few questions. Learning the answers in the following brokerage quiz just might help you determine if you are with the right firm, or if you need to make a change.

So, if you’re ready to put yourself to the test, let’s get started.

True or False: A straightforward comparison of broker commissions on basic trades can easily show you which brokers offer the lowest overall cost?

Which of the following are smart things to do when selecting a brokerage firm?

A) Research the broker for problems
B) Call the broker before sending them money
C) Know what tools the broker offers
D) Know the broker’s basic commission and fee structure
E) All of the above
F) None of the above

True of False: Brokerage firm commission rates are set the same for every trader, and the SEC prohibits a sliding fee schedule.

Which of the following are important things to know when changing brokerage firms?

A) You should do it yourself and not let your new broker handle to paperwork
B) The new account should not resemble your old account
C) Your old broker won’t charge you a transfer fee
D) Transferring equity holdings is just as easy as transferring cash
E) All of the above
F) None of the above

True of False: You can trade any kind of options, and make any kind of option trades, as soon as you open an account with your brokerage.

Which of the following are reasons you should choose a brokerage that specializes in options for your options trades?

A) Better trade execution
B) Lower costs
C) Experienced customer service
D) Education
E) All of the above
F) None of the above

True or False: Selecting an options broker that allows you to "paper trade" your account can give the new options investor a distinct leg up on understanding the options game.

Which of the following firms specialize in options trading?

A) optionsXpress
B) tradeMONSTER
C) OptionsHouse
D) thinkorswim
E) All of the above

Question 1: False – There’s a lot more to the cost of a brokerage than just commissions. Because brokers charge different commission rates for each kind of trade, a straight comparison of the cost of basic trades is not enough information to determine which firm is the low-cost leader. There are an extremely large number of possible trade combinations that will all cost a different amount in commissions. Most brokers can find some combination of trades in which they are the low-cost leader, but unless it fits the way you trade you may not be getting the lowest possible overall trading cost.

Question 2: E – When searching for a broker, you need to make sure that you keep all of the above tips in mind. Finding out what, if any, problems the broker may have; giving the brokerage firm a call to see what kind of service you are likely to get; knowing what tools — online education, paper trading, etc. — the broker offers; and knowing what they charge for specific trades and trade combinations are all essential elements for intelligently selecting a broker.

Question 3: False – While the SEC does require brokerage firms to make their basic commission rates public, there is no prohibition against negotiating better rates. Most brokerage firms are willing to discount their rates for you, and many will match the rates charged by rival brokers in an effort to get your business. Keep in mind that you can’t get what you don’t ask for, so when it comes to better commission rates, you owe it to yourself to ask.

Question 4: F – When changing brokerage firms, you should definitely let your new broker handle the paperwork. Also, your new account should resemble your old account, meaning you that if your old account is joint account, then your new account must be a joint account. If you had an IRA in the old account, then you must use the same type of IRA in the new account. When you change brokerage firms, your old broker will charge a transfer fee. And when transferring funds to a new account, the easiest and quickest way is to wire transfer cash. If you have equity holdings in your account, the transfer process will take at least a few days.

Question 5: False – When trading options, you must be approved for each "level" of trading. Option level approval is a commonly overlooked area of option trading. When a person opens an account, the broker assigns them one of several option approval levels supposedly based on the option trader’s knowledge and needs. The following matrix shows the four levels of options trading.

Level 1 – Covered Call Long Protective Puts. Abbreviated: Long Stock & (-c)

Level 2 – Long call/put. Abbreviated: (+c) / (+p)

Level 3 – Spreads. Abbreviated: {(+c) & (-c)}, {(+p) & (-p)}

Level 4 – Uncovered or Naked. Abbreviated: (-c) / (-p)

Question 6: E – If you plan on trading options, then you definitely need a brokerage firm that specializes in these kinds of trades. Brokerage firms that specialize in options generally offer better trade execution, lower costs and more experienced customer service representatives. These firms also offer great educational tools to help investors learn the proper ways to trade options.

Question 7: True – Paper trading an options account is a great way to try out new strategies and to learn trading concepts. You can buy and sell puts and calls, and test out spreads, straddles or other trading strategies, all without putting any real money at risk. Much like a pilot who trains on a flight simulator, paper trading allows you to make mistakes — and even crash and burn — without the ill effects of any lost capital.

Question 8: E – This was an easy question, we know, but it underscores the fact that when it comes to brokerages that specialize in options, there are many great choices out there.