Table of contents:
- 1 Stock Brokers: why the best is not always the right one
- 1.1 Preferences for trading in shares
- 1.2 Only the right stock broker saves money and is efficient
- 1.3 The concrete characteristics for the right stock broker
- 1.4 The seat of the stockbroker
- 1.5 Exemption orders for profit maximization
- 1.6 Trading costs are more than just order fees
- 1.7 Consider lock offers with stock brokers
- 1.8 Read the price list of the stockbroker
- 1.9 Special costs of the stockbroker
- 1.10 The right stock broker instead of currency exchange
- 1.11 Requirements for the trading platform of the stockbroker
- 1.12 External software and websites for stock trading
- 1.13 Stock brokers with a wide range of products preferred
- 1.14 Quotations of some third-party stock brokers
- 1.15 Relative advantages of a third-party provider
- 1.16 Other important aspects for stock brokers
- 1.17 Basic requirements for the good stock broker
- 1.18 Special stock brokers in brief
- 1.19 TradeRepublic revolutionizes the market for stock brokers
- 1.20 CFD and stockbroker JFD
- 1.21 Special case share CFDs
- 1.22 Conclusion on choosing the right stock broker
Stock Brokers: why the best is not always the right one
Trading in shares is becoming increasingly important in today’s world. It is true that the quota of shareholders is still alarmingly low, especially in Germany. However, there is a growing tendency to believe that at least in the long term, money can be increased by investing in shares.
The reasons for this can be both far-sighted retirement provision and short- or medium-term speculation. The different motivations also require different approaches. What is to be paid attention to therefore with the share trade, which possibilities there are and where the differences with the share brokers lie, is to be regarded here once more nearer.
Stock trading is not always the same stock trading. Therefore also the share broker should be selected with caution. Exactly the same as with CFD-Trading or Future-Trading it depends mostly on the individual needs of the investor. Even if many stock brokers are very similar in the essential characteristics, there are nevertheless striking differences. The choice of the right stock broker should therefore correspond to the own goals.
Only those who are clear about the direction in which they want their stock trading to take can ultimately decide on the right stock broker. The most important thing is your own time horizon. It makes a difference whether you want to trade short-term, i.e. intraday, medium-term with a view to a few weeks or months, or long-term. This difference often lies only in the details.
The preferred markets also play a role. Who would like to trade exclusively US stocks, will choose another broker than someone who has only German, European or all stocks in his sights. In this respect, the broker comparisons found on the Internet often make little sense. They are often designed for specific interests, but in the end they almost never meet the needs of every equity investor. Who has individual conceptions, must select its share broker also individually.
Only the right stock broker saves money and is efficient
On this basis, fees play a rather subordinate role for long-term investors, for example. For short-term traders, who have a higher trade frequency, they are extremely important. The short-term trader, on the other hand, is less interested in fundamental data, but rather in chart technical evaluations in the hourly range, while the interests of the long-term trader are rather the other way round.
For these and other reasons, there are differences in stock brokers, which should be considered. These, however, represent a difference in quality in very few cases! Rather, they are a decision criterion when choosing the broker that suits you.
The concrete characteristics for the right stock broker
For most seekers, it often seems that the fees for buying and selling are the only thing that matters. This is undoubtedly an important aspect, but not the only one that can be decisive in choosing the right stock broker. There are many more aspects, which are described in the following.
It should at least be clear that nowadays the worst conceivable broker can be your own bank. Advice is usually very subjective, trading is expensive and implementation is lengthy. The times are over. If you want to earn a reasonable return even with long-term investment horizons, there is no getting around a stock broker and a little self-study.
The seat of the stockbroker
The residency of the stock broker plays the first important role for several reasons. If you look for brokers on the Internet, you will come across many German websites. Often, however, these companies are not located in Germany, but in Great Britain, Cyprus or the Netherlands.
This is initially extremely relevant for the tax consideration of investments alone. It is well known that profits realized on the sale of shares are subject to the so-called final withholding tax. This is currently 25% plus solidarity tax and, if applicable, church tax.
If these profits are made on a German broker account, the broker automatically pays the final withholding tax to the tax office. The investor does not have to take any further action in his tax return. However, stock brokers domiciled outside Germany do not pay the final withholding tax directly. The profit remains 100% on the account. In return, the account holder usually receives an annual overview of profits and losses at the end of the year. On the basis of this overview, the profits from share transactions must be declared and taxed in the tax return.
Exemption orders for profit maximization
Even those who would like to do this work with pleasure will encounter a further disadvantage with foreign stock brokers. Because with a German broker exemption orders can be given, while this is not possible with foreign brokers. Exemption orders allow a tax-free profit of up to 801.00 euros for individuals, and up to 1602.00 euros for married couples. Any profits made by a stock broker outside Germany must therefore be taxed from the first euro.
Trading costs are more than just order fees
As mentioned above, the main focus is often on the trading costs. But trading costs are not only the fees for buying and selling shares. Beyond that one should always also take a look at the additional costs, which must be listed in the price list of the share broker.
First of all, the pure order fees are always what the broker advertises. They range from around 2.00 euros plus 0.026% of the volume per order, for example at Degiro based in the Netherlands, to a sporty 9.90 euros, for example at Comdirect. Here, advertising is done with a basic fee of only 4.90 euros. In reality, however, the minimum commission is 9.90 euros for orders with a volume of less than 2000.00 euros.
Consider lock offers with stock brokers
It is almost the rule that stock brokers advertise with trading fees that are actually only valid for certain periods of time. The Consorsbank, for example, offers fees of only 3.95 euros, which seems to be a reasonable price. However, these fees are only valid for the first 12 months and for trading volumes up to 20,000.00 Euro. It is therefore worthwhile in any case to take a close look at every stock broker!
In addition, there are almost always flat-rate trading place fees, which can range from 2.00 Euro to 3.00 Euro. Finally, there are also low stock exchange fees and brokerage fees. In total, the advertised 5.00 Euro trading fees easily turn into actual fees of approx. 8.50 Euro, for example in the fixed price portfolio of the stock broker Onvista.
Read the price list of the stockbroker
In addition to the unavoidable order costs, there is another set of costs to watch out for. First of all, one should check whether a deposit fee is required. As a rule, this is no longer the case today due to competition. But that does not mean that there are no exceptions!
Especially in stock trading, costs for the crediting of dividends can arise. Also here it is meanwhile mostly so that the share broker does not debit the process with a fee. But one should check this out anyway.
You should also compare the costs for invitations to the general meeting of a corporation whose shares you hold. These costs average around 100.00 euros, but are of course only an option that you do not have to take up.
The fees for telephone orders and other services are also interesting. These include, among other things, the preparation of account statements, income statements (for income tax purposes), the exercise of subscription rights or deposit transfers in favour of or to the debit of the account.
Special costs of the stockbroker
Three cost aspects are often little considered or underestimated. First, some stock brokers charge an inactivity fee if there has been no activity on the account within a certain period of time. Especially investors with a medium or long term horizon may incur these costs. It is therefore worthwhile to search the price list or, in case of doubt, to ask the stock broker directly.
Another aspect is possible costs for real-time prices. Of course, such real-time quotes only make sense for short-term traders. The long-term investor will usually be satisfied with daily closing prices or at least with 15 minutes delayed prices, which are free of charge. Nevertheless, one should pay attention to whether and how much a stock broker charges for obtaining real-time quotes.
The right stock broker instead of currency exchange
Finally, one should take a look at the costs of currency exchange, which can be incurred when buying on foreign, usually US stock exchanges. Because if you have a securities account in EURO, you first have to exchange the necessary amount of money into US dollars when buying American shares on a US stock exchange. In principle, this is of course done automatically by the stock broker. For this however usually an exchange fee becomes due. In addition, the trader also bears a currency risk.
In principle, the costs for the currency exchange can be avoided by opening a US dollar account directly with the London stock brokers InteractiveBrokers or CapTrader. However, this account should then only be used for the purchase of shares denominated in US dollars, as otherwise the cash balance for the purchase of shares denominated in euros would first have to be exchanged for euros. The general currency risk would still remain.
When the currency exchange can be avoided even with an account held in EURO, if one is willing to accept small disadvantages, I explain below.
Requirements for the trading platform of the stockbroker
Although the trading platform is not necessarily decisive for the choice of stock broker, one should consider what it can do. Unlike CFD trading, most brokers do not allow you to order shares with a single click, but only via an input mask. In addition, many brokers offer their own trading platforms, which run as software locally on their own computers.
Whether it must be the local software or simply the web interface of the stock broker is sufficient depends on several factors. If you want to invest your money in shares in the long term, access via web browser should be enough. However, if you want to trade in the short term or based on chart analysis, you are certainly better off with a software.
In principle, the use of a not too small selection of indicators should be possible. Be it moving averages, MACD, stochastic or even an Ichimoku and many more. Some even offer real-time news, some of which are displayed in the software or at least on the stock broker’s website.
External software and websites for stock trading
If you want to trade stocks seriously and intensively, you can also take a look at the AgenaTrader software. It often enables a connection to the stock broker and, depending on the version, has many advantages for trading in securities. Of particular interest is the screening function, which searches predefined markets with criteria for shares that meet its own specifications.
In addition, it is possible to use websites that can be used to look for promising shares relatively efficiently. Some good examples of this are tradingview.com and investing.com, both of which can be converted to the German language. In addition to many stock market-relevant news, they also offer the possibility of chart analysis and screening.
Stock brokers with a wide range of products preferred
Trading in shares is all the more attractive the more underlying assets are tradable at all. Therefore, the stock broker should enable trading with as many securities as possible. However, how broad the range of securities is often depends on the stock exchanges the broker has in his portfolio. In addition to Xetra and the secondary stock exchanges from Frankfurt to Stuttgart and Hamburg, these include the most important US stock exchanges NYSE and NASDAQ. However, the London Stock Exchange (LSE) or the Swiss Exchange (SIX) in Zurich are also of great importance.
However, when it comes to the shares offered for trading, one should always question the source of the price quotations provided by the stock broker. This is because many brokers provide prices that do not come directly from the stock exchanges, but from third-party providers who can also be market makers.
Quotations of some third-party stock brokers
The well-known Lang & Schwarz AG is a prominent example of this. Its quotes, which are usually more or less equivalent to Xetra prices, are delivered to many well-known brokers. These include Onvista (Tradegate), Flatex, DAB BNP Paribas, ViTrade, TradeRepublic, Comdirect and many more.
But there are also other stock brokers who obtain their prices from BATS (Europe & USA) or the multilateral trading system Chi-X based in London. These include in parts brokers such as InteractiveBrokers or the Cyprus-based JFD. In principle nothing speaks against it. However, the spreads here can sometimes be somewhat larger than on the actual stock exchange, to the disadvantage of the share buyer.
Relative advantages of a third-party provider
When brokers such as Lang & Schwarz supply quotes to stock brokers as a third party, this can also bring advantages. One of them is certainly the possibility of pre- and post-exchange trading, while shares traded on Xetra or Nasdaq, for example, are only tradable within their fixed times of day. The third-party providers then act as market makers. The spreads of the shares naturally widen accordingly.
Other important aspects for stock brokers
A stock broker should offer more than just a buy and sell order. This sounds obvious, but it is not. The simple buy or sell order is always a market order, which can have its pitfalls. That is why every stock broker should also, and at least, offer stop and limit orders, which can be used to set up limit purchases and set loss limits, profit hedges or take profits for existing positions.
It is advantageous if the equity broker offers trading with a broad range of ETFs in addition to the actual trading in shares. ETFs are now so widespread that there is hardly any way around them. This is especially true for those who consider long-term investments in ETFs as part of their retirement provision. For this reason, a good stock broker should also be able to offer corresponding savings plans in this segment.
Basic requirements for the good stock broker
Finally, certain basic requirements for a stock broker must not remain unmentioned. These include the broker’s information on control bodies and deposit insurance. In Germany, the deposit protection for cash holdings not held in open positions is regularly 20,000 euros. Financial transactions should be monitored by the Bafin. Stock brokers based abroad must also provide information on their website.
The decisive factor continues to be accessible and competent support, which is at best able to answer in German. Anyone wishing to test the broker of their choice before opening an account should always use the contact options, which should be easy to find on the website.
Special stock brokers in brief
In the course of 2019, American stock brokers in particular came under heavy pressure on the fee side. One of the largest and oldest trading houses, Charles Schwab, has been offering securities trading at no charge since October. Others such as E-Trade and Fidelity followed suit quickly.
The price war has not yet spread to Europe. However, with TradeRepublic and Justtrade, two special brokers are entering the market that need to be considered.
TradeRepublic revolutionizes the market for stock brokers
The stock broker TradeRepublic started business at the beginning of 2019. The highlight of the startup was the first completely free trading with shares, certificates and ETFs. The Düsseldorf-based company only charges a flat fee of 1.00 Euro for trading. Behind this is also a simplification of trading. Because the securities are bought and sold exclusively via a smartphone app. There is (so far) no desktop version.
The advantage is clear: almost free of charge, securities can be traded quickly and easily on the smartphone, which is always with you. TradeRepublic now even offers freely configurable savings plans on numerous ETFs. Even the flat fee of 1.00 Euro is omitted when buying.
By the way, the app – via Lang & Schwarz – also allows international and thus primarily US stocks to be traded. However, the prices are quoted in euros, as with other brokers linked to Lang & Schwarz, which means there is a certain currency risk. For the average retailer, however, this should be less than the costs of a currency exchange with other stock brokers, which can be avoided.
But the disadvantage is just as clear: no charts, no analysis, no research within the app. If you want to use the fee model of this stock broker, you have to draw everything else from other sources.
Justtrade followed with almost the same offer in October 2019. Both startups are basically the German version of the US stock broker Robinhood, which has been on the market for quite some time.
CFD and stockbroker JFD
The Broker JFD can also be considered a special case. The Cypriot CFD broker offers since the takeover of a bank the completely free trade with physical shares. Also here there are neither minimum volumes nor minimum numbers. Trading is typically done by a CFD broker via the metaquote platform MT5. This enables stock trading directly from the chart, and accordingly also a well-founded chart analysis using a large number of indicators.
However, there are serious disadvantages. The range of tradable shares currently comprises only about 600 shares from the USA, Germany, the Netherlands, France and Spain. Although the most liquid securities are taken into account, the air quickly becomes thin for mid- and small-caps.
A further disadvantage is the price positioning. This is done through the multilateral trading system Chi-X. The spreads therefore often deviate from the reference spreads of the respective stock exchange, especially at the opening and closing auctions. Dividend payments also appear very intransparent so far. While the final withholding tax is deducted when dividends are paid out, this does not apply when profits are realized. Since JFD is located in Cyprus, this is not surprising. Why this should apply however to the final withholding tax, could so far nobody conclusively explain.
Some stock brokers also allow trading of stock CFDs. Due to lower margin requirements and 1:5 leverage, the available equity can be traded at 5 times the amount. In addition, short positions on shares are easily possible, which is practically equivalent to a short sale.
However, the shares are never physically held. Commissions are almost regularly charged here at 5.00 euros per trade. One can indeed profit from dividend payments. However, the payout ratio is only about 70%, whereas for short positions the dividend is debited 100% from the account. In addition, there are the usual over-night holding costs for CFDs, which one should definitely keep in mind for longer holding periods, even if they are in principle very low.
Conclusion on choosing the right stock broker
If you are looking for the right stock broker, you should rarely rely on test results. Because what may still make sense for the long-term oriented investor does not necessarily apply to the short-term oriented one. Who acts rather rarely, can also accept higher fees. However, these should be justified by an extensive service offer. This includes areas such as research, charts and analysis tools or alternative investment methods such as ETFs, bonds, the design of savings plans, etc.
Traders with high trade frequency naturally look first at the trading costs. If you are willing to use chart analysis and research with other sources, interesting stock brokers with extremely low or near-zero cost models can be used. Of course, the domestic or foreign domicile plays an equally important role with regard to taxes, allowances and account currency. The above-mentioned basic conditions such as services, quotes, order possibilities etc. must be considered independently of test results and above all subjectively.
Therefore, there is no such thing as the best stock broker. There is only the right one, which best suits your individual needs.