Which type of broker/account should I begin with?

[syusuf66]

Hi all

I'm wondering what the best type of broker/account I should use as a beginner. I have not started trading yet, far from it.. but I plan to swing trade stocks, mainly US equities. I was looking at TradeKing as a suitable broker, as it has low commission fee's, but I see a lot of people talking about spread betting accounts being good for beginners because the high leverage means you don't need a huge account. I had in mind that I'd start with a $10,000 account, and actually buy/own the stocks of every trade I make, but this will obviously limit my position size hugely compared to if I was to use spread betting/derivatives. On the flip side to this, my losses would potentially be a lot more manageable than if I was to use a spread betting account straight away. I thought actually trading stocks I own outright, would be a better way to learn the ropes.. if you understand what I mean?

My question is.. do you think it's a good move for me to begin by trading stocks that I actually own outright, or do you think (if I am careful with my risk management) using a spread betting account would be a better move?

I'm aware this is a subjective thing and dependant on my personality as a trader, but just wanted to know your thoughts..? Maybe a pro's/con's outline.

(Forgive any mistakes or wrong assumptions I have made, as I am new. Hope my point is clear enough.)

Thanks
syusuf

 

[hhiusa]

Hi all

I'm wondering what the best type of broker/account I should use as a beginner. I have not started trading yet, far from it.. but I plan to swing trade stocks, mainly US equities. I was looking at TradeKing as a suitable broker, as it has low commission fee's, but I see a lot of people talking about spread betting accounts being good for beginners because the high leverage means you don't need a huge account. I had in mind that I'd start with a $10,000 account, and actually buy/own the stocks of every trade I make, but this will obviously limit my position size hugely compared to if I was to use spread betting/derivatives. On the flip side to this, my losses would potentially be a lot more manageable than if I was to use a spread betting account straight away. I thought actually trading stocks I own outright, would be a better way to learn the ropes.. if you understand what I mean?

My question is.. do you think it's a good move for me to begin by trading stocks that I actually own outright, or do you think (if I am careful with my risk management) using a spread betting account would be a better move?

I'm aware this is a subjective thing and dependant on my personality as a trader, but just wanted to know your thoughts..? Maybe a pro's/con's outline.

(Forgive any mistakes or wrong assumptions I have made, as I am new. Hope my point is clear enough.)

Thanks
syusuf

I would first look at Interactive Brokers and then look at Cobra Trading. They both have some of the lowest commissions that I have seen. Interactive Brokers has an account minimum of $10,000. Since you have that much, I would recommend them. IB's tiered commission structure starts at $0.0035/share and Cobra's starts at $0.005/share. They both get cheaper the more that you trade.

Trade King has a flat charge of $4.95/trade. This can be misleading because if you want to purchase more than say 1,000 shares, your trade may be executed in multiple lots for which you may be charged more than once. It would only benefit you to be there if you were buying more than (4.95/0.005 = 1,414) 1,414 shares at a time and even that cannot be guaranteed because of the part in blue.

 

[syusuf66]

I see. That makes a lot of sense. I read that most beginners start by using a spread betting account, and then once more capital is accumulated, they start trading actual shares instead of betting on the derivatives. Is there a clear advantage with one or the other, barring the obvious leverage a spread betting account can give you... or is it more down to preference and your personal risk tolerance? I'm finding it hard to see why people would trade actual shares (given the tax & stamp duty fees and limited position size) over using a spread-betting account to make the same trades..

 

[hhiusa]

I see. That makes a lot of sense. I read that most beginners start by using a spread betting account, and then once more capital is accumulated, they start trading actual shares instead of betting on the derivatives.

I have not read this. CFDs involves a greater risk of loss just by their nature. Positions can exceed deposits. Unless you are margin trading the physical shares of most financial instruments, then this will not happen. CFDs do not require you to front the entire cost of the trade and they allow you great leverage. This is even more of a reason why I do not like CFDs. I do not think beginners should start by using CFDs. I do not think beginners should start out by using margin accounts either.

Is there a clear advantage with one or the other, barring the obvious leverage a spread betting account can give you... or is it more down to preference and your personal risk tolerance? I'm finding it hard to see why people would trade actual shares (given the tax & stamp duty fees and limited position size) over using a spread-betting account to make the same trades..

I do not think you should count leverage as an advantage. You can get into trouble using leverage, especially if you are a beginner because you are trading with borrowed money. If your risk tolerance is high, then they are a great product.

You should not trade with money that you cannot afford to lose. That is not to say that it will not hurt or that you do not care if you lose it.

It depends upon which market you are trading? Even if you are a UK citizen and you are trading US equities, you will not be charged stamp duty.

 

[syusuf66]

ok, thanks for response.

I was planning on trading US equities and focus on swing-trading set-ups. I am aware that using leverage is way more risky, but I am also concerned that with the account size in which I plan to use in the beginning ($10,000) will limit my trading options hugely. I have in mind that I will only ever risk 1% of my account size per-trade, and if I use guaranteed stop losses in a spread betting account which would always stop-out my trade at -$100 then the risk would be limited.. Am I wrong in thinking this?

 

[hhiusa]

ok, thanks for response.

I have in mind that I will only ever risk 1% of my account size per-trade, and if I use guaranteed stop losses in a spread betting account which would always stop-out my trade at -$100 then the risk would be limited.. Am I wrong in thinking this?

You are absolutely wrong about the part in blue. There is no such thing as a guaranteed stop.

Gaps can occur overnight when prices change while the market is closed, or during the day in response to an unusual event. Even though you only put up a relatively small amount of capital to open a position, your profit or loss is based on the full value of the position.

If you paid $100 to open a CFD position, you can lose more than that $100 fairly quickly. Depending upon the amount of inherent leverage involved with the position, you stand to lose several times more than that initial $100.

IG

I was planning on trading US equities and focus on swing-trading set-ups. I am aware that using leverage is way more risky, but I am also concerned that with the account size in which I plan to use in the beginning ($10,000) will limit my trading options hugely.

In my opinion, this is just something you will have to live with. You are not a big institutional investor. Investment opportunities will always be less. There is always a bigger fish. Additionally, you are a new investor, I do not think it is wise to fooling around with more complicated instruments. Much to the chagrin of some people here, you do not get to start out driving the Lamborghini right away. I am not calling CFDs Lamborghinis; however, I am saying that you do not need to have every investment opportunity available to you to be successful.

And that being the case, so many of the 90% who fail at trading never intended to be traders at all, they just wanted to be lucky winners and stop trading asap. Makes me feel actually a bit better about the high loser percentage - they didn't fail at concientious industrious dedicated trading, they failed at trying to get lucky.

 

[syusuf66]

Yeh I completely understand about not biting off more than I can chew to start with, and I will take that into consideration.

One thing im confused about though.. I looked at IGs platform and they advertise both a stop loss and a guaranteed stop loss? The first of which will stop out your trade (in the case that it gaps down) at the market price it's dropped too, regardless of how low it's gone. The guaranteed stop loss however claims to sell your trade at the original stop loss you placed, even if the market price is lower, so you only ever lose what you originally set as your stop loss.

When you say, "there's no such thing as a guaranteed stop loss", I guess you mean for normal stop losses right? Because you could set them to minus 50 points lower than your buying price for example, but you could wake up to see they've gapped down 150 points?

 

[hhiusa]

Yeh I completely understand about not biting off more than I can chew to start with, and I will take that into consideration.

One thing im confused about though.. I looked at IGs platform and they advertise both a stop loss and a guaranteed stop loss? The first of which will stop out your trade (in the case that it gaps down) at the market price it's dropped too, regardless of how low it's gone. The guaranteed stop loss however claims to sell your trade at the original stop loss you placed, even if the market price is lower, so you only ever lose what you originally set as your stop loss.

When you say, "there's no such thing as a guaranteed stop loss", I guess you mean for normal stop losses right? Because you could set them to minus 50 points lower than your buying price for example, but you could wake up to see they've gapped down 150 points?

I mean any stop losses? CFDs are a derivative product. Someone holds the physical shares and you have a contract for a certain number of those shares. If those shares are down and have gapped below your guaranteed stop price, then the broker is on the hook for the deficit. They are not doing this because they are kind. While they do have guaranteed stops, they charge a premium for them. This is something to think about. If this did not make them money, they would not do it.

 

[syusuf66]

Yeh, I see where your coming from. Makes sense. Cheers for taking the time to explain.

 

[hhiusa]

Yeh, I see where your coming from. Makes sense. Cheers for taking the time to explain.

Are your plans still the same?

 

[syusuf66]

I'm really not sure to be honest. I am very very new to all of this stuff so I'm just trying to make sense of it all at the moment. There is a lot to take in, and I hear a lot of differing opinions. One thing I'm sure of is that I won't commit a penny of my actual money for a good few years at least. If I'm certain about anything it's that trading isn't something to go into half heartedly..

So, just out of interest, do you have any experiences yourself of big losses that exceeded your stop loss using margin accounts or spread betting ?

 

[hhiusa]

I'm really not sure to be honest. I am very very new to all of this stuff so I'm just trying to make sense of it all at the moment. There is a lot to take in, and I hear a lot of differing opinions. One thing I'm sure of is that I won't commit a penny of my actual money for a good few years at least. If I'm certain about anything it's that trading isn't something to go into half heartedly..

So, just out of interest, do you have any experiences yourself of big losses that exceeded your stop loss using margin accounts or spread betting ?

Spread betting is illegal in the US? There are CFDs for American equities but Americans cannot spread bet.

I do not overexpose my account to the point to where I exceed my margin cushion. To that end, I do not usually trade with a predefined price stop. I think it leads to premature losses. Instead, I watch the market diligently. I think it is important to have patience in the market and not run screaming for hills at the first sight of loss. If someone is worried about this, chances are that they have overexposed their account.