Singapore is a financial hub. Access to financial investments and trading is easily available to those above the legal age. With so many brokers, how can we select the right broker?
Before I list out a handful of major brokers, you’ll need to know the different instruments available to help with your selection of a broker. Are you going to trade stocks, contract for difference (CFD), options, futures or forex?
All the instruments (except for stocks) mentioned require leverage. Leverage is borrowed capital provided by broker. In this article, we will focus on trading US stocks. Trading US stocks makes for an easy understanding and the recommendation that beginners should not trade using leverage.
Which broker should I use?
The most important factors about brokers are the commission fees and platform provided.
If you trade Singapore stocks and store them in a CDP account, local brokers charge a commission fee of SG$25 per trade. There are promotions from the local brokers (DBS Vickers, OCBC Securities, Phillip Securities, UOB Kay Hian etc) so you may want to open an account with a couple of them.
Trading the US stock market through local brokers is not recommended as it is costly. Here’s a list of recommended brokers for US stocks:
The commission for each trade is a little over US$5.
They provide an excellent charting and research platform which allows you to trade options and futures.
Tastyworks is unique when it comes to charging commission. They only charge once – to initiate a position (ie to buy when you are going long or to sell when you are short selling); closing the trade is completely free.
So how much is the commission fee? Just slightly over US$5!
They also provide educational material on strategies and more! Do note that they focus more on options.
There is a small con in my opinion. Their charting platform cannot rival TD Ameritrade’s.
Interactive Brokers (IB)
These guys charge the cheapest commission in town – US$1 per trade.
Hang on! There’s a catch. You’ll need a minimum of 10 trades per month to get that rock bottom fees, and not get charged an activity fee.
This is best for super active traders.
All right! With the comparison of commission fees checked, I will talk about another deal breaker when it comes to selecting a broker.
Enter the bid-ask spread. Think about the time when you changed currency (let’s use AUD in this example) before your holiday. You go to a money changer to exchange your SGD for AUD. You are essentially selling SGD to buy AUD.
For example, if the BID for AUD/SGD is 1 and the ASK is 1.1.
The ASK price is what the money changer is asking for AUD$1. If Ben wants to buy AUD$1000, he would have to fork out SGD$1100 (1.1*1000). (money changer collects SGD$1100 and pays out AUD$1000)
The BID price is what the money changer is willing to pay for AUD$1. If Sally wants to sell AUD$1000 to the money changer, she would get back SGD$1000. (money changer pays out SGD$1000 and receives AUD$1000)
From these 2 transactions, we see that the money changer earns SGD$100. Thus, explaining the bid ask spread.
In short, this is how a money changer or dealer earns from providing a service to the public.
Knowing the main criteria – commission and slippage fees are all you need to select a broker. Taking trading as a business, these are the costs you can seek to reduce. I wish you success!
Swim Trading Resident Columnist