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Forex trading: is there a secret to success?

A private investor who has decided to try his or her hand at the stock market often faces a rather standard question: should he or she look for a good broker or can he or she use the services of his or her bank? And, most importantly, what is the difference? The answer, in fact, is simple and applies to more than just this situation: everyone should mind his own business. In other words, if you need glasses - go to Ikea: you can of course buy them in any supermarket, but you will get a lower quality product for a higher price. It's the same with the stock market - if you're going to invest in stock market assets, do it through a reliable broker.

I should say right away that it is difficult to distinguish between banks and brokers: there are different banks as well as different brokers, so any generalizations will not be correct one way or the other. Nevertheless, it is possible to highlight the main differences between a quality broker and an average bank offering brokerage services to their clients:

1) Trading platform.

For a broker, serving investors is the main task, unlike a classic bank, for which it is a side business. Consequently, this leads, among other things, to the fact that banks are not willing to spend significant resources to develop quality online trading platforms. At the same time brokers, on the contrary, understand the importance of high-quality and convenient trading software, and they are ready to invest in its development, because their main business depends on it - so if you want to trade a lot of different assets comfortably, you need a good broker.


2) Direct Market Access, DMA.

One of the main benefits of a good broker is direct access to the exchanges, where your order is sent directly to the exchange. Many banks accept orders only by phone - so you have an extra link in the chain, which increases your transaction costs and reduces the speed of execution, which is very important in the stock market, because the quotes change very quickly.

3) Trading Hours.

The consequence of the previous two points is that through a broker you can trade around the clock on different platforms, if only the markets were open. With banks, on the other hand, it's more complicated: they don't operate at night, on weekends, on holidays, etc. If, for example, you try to actively invest in U.S. assets through a bank, you will quickly become frustrated with the idea when you realize that your bank is closed when the U.S. markets are open.

4) Fees.

As a general rule, banks charge higher commissions than brokers - since this is an additional business, most lending institutions have a "high margin for low turnover" approach. At the same time most of the brokers work with opposite model ("high turnover with low margin"): a broker earns on number of clients, but not on high commissions. Thus an average broker will offer you more favorable trading conditions than a bank. Also, don't forget that the bank has a whole army of product/legal/propagandists - in other words, the bank has more opportunities to hide the high commissions somewhere in the bowels of the contract than the broker does.

5) Instruments and markets.

Brokers provide a wider range of instruments and exchanges than banks, again a direct consequence of the fact that for brokers this is their core business. You can trade stocks, bonds, currencies, futures, options, funds, or even bitcoins, all through a single broker, and you're unlikely to find a bank that can offer you a comparable set of instruments. Moreover, many brokers gladly meet the wishes of their clients and add exchanges/instruments at their request - try to do it at your bank!

6) Reporting

Banks only provide minimal reporting - if you intend to trade seriously, you won't have enough. At the same time brokers not only offer their clients detailed reports on performed deals, but it is also a competitive advantage - in other words, every broker is interested in having better and more convenient reporting system, than competitors.

7) Proprietary trading, prop-trading

Proprietary trading is trading on financial markets with a company's own funds. For example, when a bank uses its own funds to invest in stocks for the purpose of making a profit - this is prop-trading. Such approach carries rather serious risks for a private investor from two points of view. Firstly, investment in the stock market is always a risk, and nobody will give you any guarantees that tomorrow your bank will not announce multibillion losses incurred by it in the stock market and will not close down - there have been precedents and quite a few of them. Secondly, there is a risk that if you don't have proper control, your funds can be used by the bank for its own purposes: for instance, a trader who loses his money may try to use your money to cover his losses, hoping that he will have time to recover his losses before someone finds out they're missing, and it does happen. At the same time a normal broker fundamentally does not engage in proprietary trading, but earns on commissions and, thus, is directly interested in the growth of his clients' funds - the more money they have, the more they trade and the more the broker earns.

In addition to the basic differences above, there are other subtleties, but we will discuss them later when I tell you how to choose a particular broker and how they differ. For now, you need to remember the main difference between a bank and a broker: for banks, servicing private exchange investors is not their core business as opposed to brokers. Banks provide such services on the residual principle, because nobody chooses the bank, being guided by quality of its exchange services - clients are first of all interested in its reliability, price policy and range of bank products and quality of service within the frame of such services. Thus, it does not make sense for the average bank to particularly invest into development of exchange services for private clients - that is why you will overpay for services of lower quality than those offered to you by a good broker.

If you do decide to invest in stock market assets, do it properly and through a broker who has your interests as a private investor at heart, unlike the banks.


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