FOOL SCHOOL
Choosing The Best Broker - Part 1

September 29, 2003

To make the process of comparing costs as easy as possible, we devised this handy page that allows you to compare brokers. But first, ask yourself these questions:

1. Are lower dealing charges very important to you?

In many people's minds, this is the most important question, and one to which they will always answer "YES!"

This question goes a little deeper, though. Really, it should be phrased as, "Do you want the lowest dealing charges, compared to all other online brokers at all trade sizes?" What you have to consider here is the actual monetary size of the trades you plan to make. Some brokers impose minimum and maximum dealing fees. Those that don't will probably be cheaper for much smaller deals, but more expensive for larger ones.

If minimum and maximum fees charges aren't important, and you'll be trading high volumes, do you care that you may pay £6.50 more on a £10,000 trade? Is that unimportant or essential? If you are only trading in very small amounts, not having a minimum charge could save you £10 on a deal of £500, when compared to a online broker that does impose a minimum charge. You'll need to work out your trade sizes and then check out this comparison table to get a feel for this question.

Don't forget, if you're a smaller investor at present, there's no reason why you can't open an account with one broker now for smaller trades and, when you have built up a bigger sum, transfer your account to another broker that offers better deals on larger trades. Just look at the transfer fees and plan ahead.

2. How often will you trade?

You should estimate how often you're going to trade over the course of a year. If you are going to trade frequently, then you may get better rates by paying a higher annual account fee to a broker in return for lower ongoing dealing charges. This may work out cheaper if you plan to trade more than ten times a year. But if the company charges for this service and you don't meet the minimum number of trades, you'll end up wasting money. However, some companies offer a system where your normal annual fee is waived if you trade more than a certain number of times a year. Some even offer lower dealing charges if you deal more than a pre-determined number of times in a set period.

3. Are you willing to pay higher annual charges to get extra facilities?

Some accounts (particularly ISA accounts) charge a fee based on the number of stocks that you hold, or the value of your holdings. Some charge per quarter, some per half-year, others have annual fees. Some also have minimum and maximum charges. Some charge quite a bit more than others, with the extra usually - but not always - going towards providing extra facilities, such as free registration as a shareholder. You need to decide if you are willing to pay higher annual charges to gain these extra facilities.

4. Are low share-transfer charges important to you?

At some point, you'll have to transfer money or shares into your account in order to trade. At other times, you'll want to transfer money out. You may even want to transfer shares out, either to another broker or to live off for many years to come. After all, if you intend to hold the stock through thick and thin for many years, why pay annual charges for that holding, when you could get the certificate sent directly to you? That might be a more Foolish proposition in the long run.

Transferring money in and out will not normally cost you anything, but transferring shares in and out can. Transfers out, for obvious reasons (the brokers lose custom and make less in annual fees), is normally the direction that incurs a charge. If you are a long-term buy-and-hold fan, and you really don't want to incur much in charges, then check out the transfer fees for stock certificates. The decision to pay between one and three years' annual charges upfront to get a certificate, for example, may be more cost-effective than ten years' worth of charges. Obviously, this reduces your ability to trade instantly, as you have to send the certificates back in, but how important this is depends on what kind of investor you are.

> Part 2