Choosing an online broker
- Apart from dealing with a legitimate service provider duly licensed in its jurisdiction, consider the type of service offered, fees & charges, system friendliness and reliability when choosing online trading service.
You might find the choices among online trading platforms overwhelming. You can make this task much easier by asking yourself the following key questions:
Is the service provider legitimate?
The SFC's licensing requirements are applicable to all online trading businesses related to the securities and futures sectors in Hong Kong. You should make sure that the service provider of your online trading platform is licensed by the SFC. You may check this by visiting the SFC website. Banks carrying on such business are required to be registered with the SFC as "registered institutions". The Hong Kong Monetary Authority remains the frontline regulator of banks' securities and futures operations.
If you choose an online trading service provider who is located overseas, make sure you are dealing with one that is licensed in that particular jurisdiction. Many regulators offer investor access to their lists of authorised brokerages for checking. If a firm is not licensed in a jurisdiction, it is best not to use its services. In addition, it is important to get acquainted with the regulations and investor compensation systems that are applicable in the markets concerned.
What are the services offered?
Compare the services of different online brokerages to find one that suits your needs.
- Level of services
Some online brokerages concentrate on "execution-only" business with limited value-added services but lower commissions. They may not give advice to their clients but simply route the orders to the market on receipt. Others may provide a range of additional services that may include price quotes, market news, research materials, advisory services, discretionary accounts, margin financing and analytical tools. You should carefully consider which type of brokerage best suits your investment experience and goals.
Apart from trading in local securities, futures, options, leveraged foreign exchange contracts, some online brokerages also provide trading services in overseas securities and derivatives.
- Service access channels
Your online brokerages may offer multiple channels including wireless access, hand-held devices and proprietary electronic systems for you to access trading services. Apart from electronic means, some online brokerages also provide trading services through traditional means including manned and automated phone trading services.
What are the fees and charges?
Brokerages must fully disclose all charges and fees to their clients. These charges and fees may include brokerage commissions, charges for stock transfer and custody, dividends collection fees, etc. Service provider may also set different commission rates for orders placed through different channels and for trading different products, order types (e.g. market versus limit order) and order sizes.
For value-added services, you should understand the nature of the service and the price structure, eg, charges for real-time price quotes and research tools, interest rates for margin loans, etc.
It is important to clarify the fees and charges right from the start. Ask which kind of arrangement would be in your best interest.
How user-friendly is the website?
Browse through the websites of online brokerages to see how user-friendly they are. Market news and account information should be easily accessible. Some brokerages provide demonstrations that will walk you through the process of making a trade before you open an account.
Find out how easy to get assistance if something goes wrong. Is there a customer hotline? Does this hotline operate round-the-clock?
How reliable is the system?
You should find out what security measures are in place to prevent unauthorised access to brokerage and customer information. Some common security measures include the use of firewall technology, passwords, encryption, e-certificates, electronic signatures, Secure Socket Layer (SSL) and other authentication measures to safeguard the transmission of confidential information.
You should also understand the risks arising from the limitations of an online brokerage's system. System limitations may cause inefficiency in handling huge volumes of trades, system outages or delays.
SFC licensed intermediaries are required to have written procedures in place to handle contingencies and communicate to clients the alternative means available to handle their trading requests. It is best to discuss the available options with your brokerage in advance and be prepared to use alternative channels to place orders and get information.
How to open an online account?
You may be able to open an account online. However the brokerage must take steps to verify your identity and your account will not be activated until the brokerage has received and processed your signed application. The brokerage may ask you to mail in your signed application or come to their office so that account opening documents are signed in the presence of their staff. You will also be required to sign the client agreement before the application can be completed. Make sure you understand and agree with the terms and conditions of the client agreement and the risks associated with online transactions before you sign it. The risks of online trading should be clearly expressed on the website or in the client agreement.
What is the online transaction process?
Make sure you understand the transaction process and pay special attention to the following areas to determine whether these service offerings really suit your investment needs. When in doubt, always ask questions:
What are the authentication measures (e.g. password, e-certificate)? In the event of a network breakdown, what alternatives are available for placing orders and receiving confirmation?
- Order flow
What is the order flow? What order types are available (eg, market order, limit order)? Any limitations on order size (eg, lot size, dollar amount)? How do I know the order status and get the order confirmation? How to cancel or amend orders? Will orders be accepted 24 hours a day or only during trading hours of the relevant market?
- Processing time
What is the processing time for cash deposited to the accounts and how long does it take to withdraw cash? To avoid interruption to your plans, find out more about processing time required for different procedures.
Ask questions! Shop around!
When choosing an online brokerage, you have to know the firm you are dealing with and make sure the firm provides services that are in line with your investment objectives and skills. Remember, investor protection - at its most basic and effective level - starts with the investor. The key to protecting yourself is to "ask questions and shop around".