Just thought to share my 2 cents worth on certain things to look out for when choosing a broker. As part of investing, you need to have a broker in order to book trades. I’ve had to look for a suitable broker and here are just some of the things to look out for when considering a broker. But first, what is a broker and why do we need them? From Wikipedia, a brokerage firm is an institution, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission. We need them to help process our transactions in buying or selling securities and they earn a fee on each transaction we make. Now we can begin considering the things to look out for.
Everyone has their own individual bias and investing style. Similarly, no brokers are entirely alike and they may be catered to different investing styles. Some are more suited for high trading frequency, which caters to the traders, and others are more suited to buy and hold, where they do not charge you for holding periods. You have to decide which path you want to take and find out more information on the brokers on how are they charging you. Do they charge you only per transaction or do they charge you for the duration that you hold the security?
Type of Securities
Next, decide the type of securities you want to invest/trade in. There is a plethora of products out there, from shares, bonds,CFDs, options, futures, commodities, etc., and not all brokers will allow you to transact in all of them. Most of the local Singapore brokers will provide the usual shares, bonds and ETFs, but may not have access to the more complicated derivatives while the foreign brokers will typically provide a buffet of securities for you to choose from.
Different people also have different preference for stock markets, and you have to decide which market you want to invest in. Some people may find SGX stock market boring and prefer to want something more interesting like in the US markets or somewhere else. Just note that not all brokers will allow you to trade in all the global markets.
CDP Account and Custodian Account
When you buy securities, you need a virtual storage place to put them in. In the past, shares change hands via a physical stock certificate. Now, everything is virtual. What is CDP? It is actually the Central Depository, the virtual storage place for SGX securities. Take note that it is separate from the broker account but typically you are able to open a CDP account along with your broker account. Your broker will help you to process your CDP account opening. This will take approximately 3-4 weeks. Mine took about 2-3 weeks where both my CDP and brokerage accounts are opened. So if you have a CDP account and you buy some shares, they will be stored in the CDP account and you will own those shares. However, there are some brokers which have something called the custodian account, which in simple terms, more like an account placed at the broker, but you do not own the shares, the broker does. The shares will be deposited in the broker’s account and you will be able to see the shares in your account with the broker. This gives the broker more flexibility with the securities and on the other hand, you pay less commission fees compared to a broker account with a linked CDP account. Take note that though you pay lesser commission fees, in the event that the broker goes bankrupt, there is no certainty that you will be able to retrieve your shares while if they are stored in your CDP account and your broker goes bankrupt, you still own your shares and you just get another broker to perform transactions for you. Take note that this is only applicable for local Singapore shares. If you are planning to invest in overseas stock market, your broker will definitely place your shares in their own custodian account.
Brokerage commission fees
Different brokers have varying competitive advantages and this can translate into slight variance in commission fees. I say slight variance because most of them charge almost similar rates. For the local brokers, the minimum charge is typically around 25SGD or 0.2+% for online trades along with the mandatory transaction charges such as clearing fee and SGX trading fee. Of course, if you are not using online broker but human broker, the charges are more expensive. Someone has to pay the broker for his manual labour to perform the transaction after all. Also, if you are planning to invest in overseas market, do remember to compare the rates for custodian, dividend collection, corporate action, etc. Different brokers charge differently due to their competitive advantages. There are also slight variants of cash-upfront accounts, whereby you put cash into your account with the broker and you will get better commission fees.
This is crucial in helping you get the best price out of the transaction be it buying, selling or short selling. The most common order type seen will be the “limit order”, which is to buy or sell a number of designated shares at a specific price or better. There are many other order types such as market-to-limit orders, market orders etc, and brokers may offer different order types and for different markets as well. It would be good to go through the kind of order types that each broker may offer and also match against your own individual investment philosophy to determine what kind of order types you need.
Currency exchange rate/currency account
This pertains to more of investing in stock markets other than SGX or those stocks listed on SGX but denominated in a different currency. Currency risk is subtle, but different brokers will probably have different exchange rates with varying spreads. Would be good to know if the difference in exchange rates will eat into your PnL and how much does it affect your stock portfolio.
Ok, so this factor doesn’t really pertain to the consideration of broker, but still good to bear in mind the tax factor. The good thing about trading in SGX stock market is that there are generally no capital gains tax no dividend tax except for dividends from REITs which have a taxable component as REITS are to distribute almost all their earnings to shareholders. There is a taxable component for their dividends distributed which is taxable at the personal income level and not the corporate level. However, the tax rules that applies to Singaporeans investing in SGX shares may not apply to foreigners/non-residents investing in SGX shares and it will be a different case in the various stock markets. For example, for a Singaporean investing in the US market (assuming he/she meets the definition of a foreign investor in US terms), he/she does not have to pay capital gain tax, but there is a 30% withholding tax from Uncle Sam. This means that instead of a $1 dividend expected to receive from the US share, only $0.70 is paid out.
In conclusion, more in depth research and comparison is required to find the best suited broker for your needs. However, there is no need to only have a single broker. You can have various brokers to cater to your different needs. After all, they are more like your clothes or underwear, where you can have a variety and don’t have to wear the same stuff everywhere and less like your girlfriend/boyfriend, whereby one is enough.