CHAPTER 2 What to Look for in a Broker

Before you trade any financial instrument, you must open a brokerage account. Yes, more paperwork! But for many, that is not the worst part. There are many terms and concepts embedded in the paperwork that are foreign to most new investors. And there are many warnings as to the risks of various types of investments. In fact, there are additional risk disclosures specific to options you must read and sign when you open an account that allows options trading. But what brokers do not warn you about are the risks that are inherent in choosing the right brokerage firm. What do I mean by that? Let’s explore the topic in more depth.

Brokerages versus Banks

Most people are comfortable putting their money into banks. They are sure that when they drive to their local branch and ask for $300 to do some shopping, the bank will comply. They are also comfortable that when they choose to withdraw large percentages of their accounts, the bank will not have a problem coming up with the funds. This is particularly true for larger banks. Despite some times of distress, such as our most recent financial crisis of 2008–2009, the fact that the government-run FDIC (Federal Deposit Insurance Corporation) insures accounts for up to a total of $250,000 for each deposit ownership category in each insured bank lends further security to the depositor. But what do banks do with your money when you deposit it? If you are to be truly comfortable, shouldn’t you know ...

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