Choosing a broker for international trading may be decidedly more complicated than picking a broker who trades locally. Such brokers typically act as intermediaries between investors and international securities markets. In addition to the risks faced by investors investing in the local market, such investors are exposed to the following risks as well:
- Forex Risk
This is the risk attributable to the variation in exchange rates in currencies. One’s foreign-denominated assets may enjoy capital gains but may result in losses when those prices are converted back to the domestic currency.
- Information Asymmetry On The Part Of The Investor
This simply means that you, as a resident in your domestic country, may not know what exactly is going on in another country (in which you have acquired assets) and as such cannot make appropriate investment decisions with regards to these foreign countries.
With this in mind, there are a couple of things one should keep in mind when choosing a broker for international trading:
Knowing one’s needs
It is imperative for one to first determine what they require from a broker before deciding on one. This is dependent on the following factors:
- One’s Character
In this context, one needs to determine whether they are an active investor or a passive investor. A passive investor aims to maximize his returns over the long – run by minimizing his transactions. The reasoning behind this is to minimize transaction fees and the performance lag that may come about as a result of frequent trading. Active investors buy and sell securities continuously to take advantage of profitable opportunities.
- Knowledge And Expertise Of Investor
A knowledgeable investor may know exactly what he wants and as such be able to specify which securities he expects in his portfolio. Further, investors with more knowledge may be able to specify more advanced securities such as derivatives.
Investors newer to the game may require brokers who can selecting portfolios specific to them.
- Which Resources Does One Require?
Experienced investors may require complex financial reports on the markets or market forecasts. Investors who may not be as conversant with the market may not require these reports.
Check the broker’s credibility.
Due to the typical investor’s lack of technical jargon or knowledge on the mechanisms of foreign trading, fake brokers may take advantage if this to build pyramid schemes and con people out of their money. They may do this by building flashy websites to lure unsuspecting investors or display fake credentials on their websites to win over investor confidence.
One should always do business with reputable firms and strive to understand how policies within the country protect the consumer if the worst comes to happen. Further, one should strive to find out which laws financial brokers fall under as well as a national registry of licensed brokers to verify these brokers. Granted, there are legal means to recover your money if you are duped but prevention is better than cure. Carrying out the due diligence may just save you a lot of time and effort.
Check costs carefully
Investors typically focus on commission fees charged by brokers without regard for other costs. However, brokers may levy many other costs such as purchase fees (for some assets such as unit trusts), Others may guarantee surprisingly low rates only to recoup this through high management fees or even currency conversion costs. Investors should consider all the costs to calculate total cost in international share trading.
Do not let them upsell you
At the end of the day, the broker depends on commission he generates from his trade. Consequently, he may try to encourage to trade more often than is necessary or persuade you into purchasing products or services you may not need. Be wary of such brokers cause these transactions may significantly decrease your portfolio.