Analysis: why brokers are needed, how much it costs to be an investor, how exchange assets are protected

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In our blog we regularly write about the structure of the stock and financial markets, various behavioral strategies for investors, fintech technologies, etc. In the last couple of years, there has been an influx of new investors to Russian stock exchanges – this is partly due to growing financial literacy, partly due to low deposit rates, and partly due to serious volatility in world markets, which makes it possible to earn money.

Beginning investors have many questions, from the understanding of the answers to which the success of their activities on the exchange may depend. Today we will try to answer the most important of them.

Why brokers are needed on the exchange

According to current laws, private individuals cannot directly sell and buy shares on the stock exchange. This requires a license. Specialized intermediaries, called brokers, have it.

The main objectives of the broker:

• register customers on the exchange,
• assign codes to them for transactions,
• keep records of funds and assets (stocks, bonds, etc.),
• make calculations
• act as the tax agent of the client (calculate and withhold personal income tax).

In 2019, about three hundred brokerage companies operated in Russia. Among them there are organizations that are part of a financial group, for example, with banks, and independent companies.

Choosing a broker from hundreds may seem like a difficult task, however, there are quite clear criteria that you should rely on when analyzing. Here’s what you should pay attention to:

• Availability of regulator licenses – Now in Russia it is the Central Bank. Russian brokers should publish licenses of the Central Bank on the website, if you see some obscure papers in foreign languages ​​issued by foreign regulators (or some other organizations) – this is a red flag that should not be ignored.
• Company Reliability Rating – it is clear that there are a lot of ratings, their compilers use different methods, etc. However, top ratings usually consist of the same companies, those that show consistently high results and should be considered first.
• Market life – everything is logical here, if a company has been operating on the market for more than a dozen years, then it has already experienced many crisis periods in the economy – this is a clear plus.
• Availability of access to Russian and international sites – Information about the broker’s membership at various sites should also be presented on the site. If you can work with different markets within a single account, this is another big plus.
• Variety of tariff plans and transparency of settlements – This will be discussed below.

Open a brokerage account can online. We’ve figured out the basic criteria, now let’s talk about what actually the costs await the investor.

How much does it cost to be an investor

The money an investor pays when buying stocks and other instruments is far from the only costs you should be aware of. There are several types of brokerage fees.

• Commission for operations – a certain percentage of the transaction amount. Sometimes turnover is also taken into account – the higher the investor’s trading volumes (many small transactions or not very many, but large), the lower the commission. An important point: there is still a commission of the exchange itself, in ITI Capital it is included in the tariffs.
• Custody service – The rights of investors to securities are taken into account by the broker’s depository. These services are also paid. There are various rates – for investors or for speculators.
• Software, infrastructure for trade – there are both free and paid trading applications and programs, services of direct connection to the exchange bypassing the broker’s infrastructure, colocation of servers to place them as close to the trading core as possible – these costs can be quite significant.
• Extra charges – In addition to the costs described above, there are various additional fees. For example, commissions for withdrawing funds, interest on margin lending for transactions with leverage, etc.

We have developed a convenient calculatorwith which you can easily calculate the cost of services. Tariffs can be viewed here, for beginning investors there is an opportunity to use a special free tariff for 30 days.

What happens to stocks if a broker goes bankrupt

One of the common questions is how are the assets of exchange investors protected? It is important to understand that a tool similar to the bank deposit insurance system does not exist for the exchange. That is, the money and assets of customers are not insured. However, if a brokerage company for some reason stops working, then by law, customers should be able to transfer their securities to the depository of another company or directly to the registers of companies that issued shares.

The transfer of shares is similar to a money transfer – this is not the most difficult operation, which can also be taxed with commissions.

Of course, in the case of dishonest brokers, problems are possible – in theory, there is a possibility of loss of assets and money in bankruptcy. There have been several similar cases in Russian history, one of the most recent being the bankruptcy of Energocapital.

You can protect yourself from such troubles by choosing a reliable brokerage company that has all the licenses and many years on the market. This seriously reduces the likelihood of losing all assets.

What to read about investments

In this material, we have collected ten books that will help you understand the structure of the modern stock market, the intricacies of investing in it, and how advanced technologies are used here.

But here collected analytical articles on the current situation in the markets in Russia and the world.

Useful links on the topic of investment and stock trading:

• Test account with virtual money
• Software for trading on the exchange: trading terminal, mobile applications
• Model Portfolios

Read reviews, market analytics and investment ideas in Telegram channel ITI Capital