For newcomers to trading, it can be exciting – yet confusing – to learn about what, when, where, and how to trade.
One of those questions that trip up many newbies is where to trade – that is, should you use a trading broker or head directly to an exchange?
There are many advantages to accessing the best trading platform for your needs. Still, you will need to decide whether you want to go down the broker or exchange route – that decision will be based on how often you plan to trade, what you wish to invest in, and at what volume.
Hopefully, this article will be a helpful starting point in your decision-making process!
What is a trading broker?
A trading broker performs the same role as a broker in any other industry. For example, think about insurance – you may use a broker to secure the best deal when insuring your home, car, or health, and then they complete the necessary actions on your behalf.
A trading broker is no different. You instruct them to invest in a specific stock, forex pair, cryptocurrency, or other assets, and they will act on your behalf to secure (in most cases) the best price – some brokers have partnerships that enable them to access a better-than-market rate that you won’t see advertised to the public.
The downside of using a broker is that you will need to pay a fee for their services. If you are trading on a tight budget, it may be worth asking the question as to whether this would be the most efficient way to spend your money.
On the flip side, if you are trading at a higher volume or want to take a completely passive approach, using a broker has plenty of advantages.
What is a trading exchange?
At a trading exchange, you cut out the need for a broker and instead head straight to the market – that is, you (as a buyer or seller) are transacting with a fellow trader (the opposite side of the trade) directly without any other input.
The advantages of this are plentiful. Trading on an exchange is quicker, of course, with the opening and closing of positions possible in seconds.
You won’t have to pay any commission to a broker either – although the exchange may charge a transaction fee, so it’s always worth making a note of the platform’s terms and conditions.
Key differences between brokers and exchanges
Now that we have a general idea of what a trading broker and exchange are, we can consider which might be the best option for you.
One of the interesting things about using a regulated broker is that your money should, in theory, be more secure. These firms will implement various financial protection measures, so you can rest assured that your capital is in safe hands.
A trading broker may also be able to offer you facilities that an exchange cannot. Leverage is one such tool – you can enter the market with an enhanced position by accepting the leverage provided by a broker. However, this comes with risks when the market takes a downturn. That is a topic you should research in-depth.
It’s also worth remembering that brokers generally have access to a greater liquidity pool. Now, if you are trading at a low level, then the standard exchange will usually be able to satisfy your requirements, although you may find wider spreads at those exchanges where trading volumes are lower.
But a broker should be able to invest your money in a deeper pool, and the benefit of that is tighter spreads – meaning that you won’t lose any (or at least a lower amount) of your profit when closing your position.
All of which sounds like a compelling case for using a broker in your trading, although caution is advised. Unregulated brokers are not held to account as robustly as those that have secured accreditation, so instructing them is done at your own risk – they might not protect your funds in the same way as a regulated firm, either.
Note that brokers aren’t always the best option when speed in and out of the market is critical. So, suppose you plan to take advantage of day or swing trading opportunities or implement a strategy like scalping. In that case, there is little value in using a broker – they will only slow the process down, and you may have lost your price edge by the time they have actioned a trade on your behalf.
So, what kind of a trader do you want to be? What are your aspirations and your budget? These questions will determine whether you head down the broker or exchange route.