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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Most brokerage firms provide either stocks and options or futures, not both, because futures are regulated separately from stocks and optionsQUESTIONS FOR POTENTIAL BROKERS Remember, your broker is in the business of looking after your interests. Make sure you find a broker that is licensed to execute stocks and options or futures transactions. Most brokerage firms provide either stocks and options or futures, not both, because futures are regulated separately from stocks and options. Some firms, like Cybertrader, allow you to trade both, but you must maintain two separate accounts in order to do so. In either case, your chief concern as a trader should be to get the transaction executed as you desire and at the best price possible. Choosing the right broker is essential to your success. But how do you find the right one? When choosing a broker, review the following four points: 1. Does your broker really know more than you do? Your broker should be an asset to you, should have sufficient knowledge of the markets you trade and invest in, and be able to make first-rate suggestions to help you increase your profitability. As a novice investor, be very careful with your broker selection. Look for a broker who has knowledge about a wide variety of option markets, including margins, spread strategies, volatility, points, strikes, and so on. Interview potential brokers by presenting a specific trade to see if she or he can talk intelligently about it. Can she or he define the market conditions, risk, potential return, breakevens, and so on? Ask the broker how much of a percentage of their revenue comes from options. Look for a broker with a similar risk profile as yours. Most importantly, make sure your personality fits the brokers personalityyou really have to be comfortable with their style and time availability. You should also find out if your brokers backup assistants understand options as well. Inevitably, you will end up dealing with assistants, and they need to be knowledgeable about options or you will find frustration down the road. 2. Invest your own account. Information from your broker should be viewed as a potential opportunity, not as advice. Once again, ask your broker for suggestions, not advice. It is very important that you always take responsibility for your own profitability. 3. Do your own homework. Study, study, study. Continue to do your homework even after youve achieved success, because the learning process never ends when youre in the investment field. The day you think you have learned it all is the day you should retire. Overconfidence leads to complacency and losses. 4. Always listen and digest before making any investment decisions. Remember, you can always call your broker back. When you call, listen to what your broker has to say, but never make an investment while still on the phone. End the call and put the phone down. Think about the information you have received and then do an analysis of risk and reward. If you still find the suggestion to be valuable, then call back and make the investment. My biggest mistakes were hasty investment decisions. WHAT MAKES A GOOD BROKER? Much advice has been given as to just what makes a good broker, and just what one must look for in opening a brokerage account. The key elements of most advice come down to the following issues: Commissions. You want them as low as possible, but be carefula low commission structure may mean that you dont get the level of service you may want and need. Minimum account size requirements. This can vary anywhere from $500 up to and above $25,000 to open an account. While the size of your trading account may limit you to certain low-requirement brokers, keep in mind that to open a marginable account (required for spread trading) there is a minimum $2,000 balance requirement beyond any options you own. Thus you must have a minimum of $2,000 in cash or nonmargined securities available before you even start to trade. Hence, a $2,500 opening balance would only permit you to enter a trade (or trades) with a net $500 debit position. Needless to say, this will severely restrict what trades can be placed. Other requirements of the brokerage house. Check to see what other requirements may be in effect. For instance, how are good till canceled (GTC) orders handled, if at all? For instance, many houses will not enter a GTC order on a spread trade. If you want to trade this way, then special arrangements will have to be made for you (the broker will automatically reenter the trade each morning, etc.). Youll need to adjust your trading style or find a different broker. Speed and accuracy of fills. This is something that is very difficult to de termine before opening an account, other than by talking with other traders. However, good is really in the eye of the beholderif it is profitable for you, then it is good, regardless of what others may think. Optionable and spreadable accounts available. In particular, make sure that in calculating margin requirements on your account that the brokerage house gives you credit for your long position as an offset to your short. You do not want the house to be calculating margin based on the short position only! Experience in trading options in general and combination trades in particular. You will want your broker familiar with options, and hopefully, with option strategies, so that they can anticipate your needs. Ability to fill the order between the spread. If you place your buy or ders at the ask and sell orders at the bid prices, will the broker routinely get you a better price? If so, you can then place an order such that you will be filled, with the broker working the difference to get you the best price. Online brokers typically do not do this, as everything is placed electronically. General comfort level with the broker. This is a very subjective point, but probably the most important. You must feel that the broker is looking out for your interests. After all, your broker has your money. Even if youre only placing trades online, it is important to feel comfortable about the firm you are dealing with on a regular basis. Once you have chosen a broker, however, the fun begins. As you are likely aware from your own business, there are customers or clients that you enjoy dealing with and others whose call you dread taking. Obviously, those whom you enjoy dealing with will get service beyond the minimum and will generally be happier with their experience than will the troublesome customersso, too, in the world of brokers. Two personal experiences come to mind when thinking of good brokers. In one case, we had been discussing exiting a trade for several weeks. Finally, I put the order in. About three minutes later, I got a phone call from my broker, saying that no, she hadnt filled the order, but rather had pulled it. It seems that after sending the trade to the floor, she overheard someone talking about a takeover rumor. On checking, she found that the stock was indeed in play, and in fact trading had been halted. On reopening, the shares gapped up about $5, and that is where I would have been filled had she not pulled the trade. By pulling it, she enabled me to watch the stock drift up about $15 over the next week, which turned an otherwise small loss into a very profitable trade. The second example is a situation where I got a call back from the broker checking to see if my trade was accurate. I normally use bull positions when trading, and I had inadvertently entered a bear spread on this particular trade. Upon checking, I found that indeed I had transposed my buy and sell options on the trade. It was my error, and could have been quite expensive. So, what will get you the best treatment? Besides common courtesy, the key factor mentioned by various brokers in an informal survey I conducted was that the customer has to have a plan, and has to articulate the plan with them. What do you expect from the account? What are your goalsretirement portfolio, current income, and so on? What risks are you willing to take? What types of trades do you like or dislike? Are there industries you want to avoid or to specialize in? Such information can obviously help them to recognize situations that may interest you. Reviewing your account periodically with your broker is also important. Obviously, as a trader, you will be in frequent contact with your broker regarding your trades, but periodically you should review your goals with your broker. If your trades are then deviating from your stated goals, the broker can better question if indeed this is what you really want to be doing. This, of course, would not apply if you were dealing only with an online broker. In that case, it will be up to you to review your goals and your trades to make sure you are staying on track. Knowing what you need from the broker and asking for specific information also looms high on the list of good customer traits. If you are on a fishing expedition and dont know exactly what you need, or what you need is not absolutely critical for this instant, wait until after market hours for such discussions. In other words, be judicious with your brokers time. In this same vein, ask questions when you are unsure. Whether it is a definition (a chocolate milkshake in Chicago is a different beverage than one in New Yorki.e., different terms are frequently used for the same concept) or it is a new strategy, ask your broker to explain it. Dont make guesses; your broker is willing to help. It is a lot easier to spend 30 seconds in explanation up front rather than trying to unwind some position you got into by not understanding what was happening. The most surprising comment of my informal survey came from a brokerage dealing primarily in options, one where all of the brokers have actual trading-floor experience. The comment was that this broker preferred longer-term investors. He much preferred customers who had 90 percent of their investments in long-term positions and limited their short-term plays to less than 10 percent of their portfolio. Short-term traders dont last. The worst type of account, according to one full-service broker, is the customer simply handing them a check and saying to make me money. With no direction, no understanding of risk tolerances, and no clear goals, it is almost impossible to satisfy such a client. Decision making is important on the part of the client. Clients who cannot make up their minds, clients who ask for advice and then go away to think about it, never returning with an answer, lead to frustration on the part of the broker. A final problem client is the one who expects much service, but then doesnt trade with that brokerand instead goes elsewhere. Obviously this is a problem faced much more frequently by the full-service broker, but even the discount brokers seem to have such problems. Obviously the broker understands that they wont get every trade, nor does every request for information result in a trade, but commissions pay them, so they expect some reasonable relationship between the amount of service delivered and the amount of trading through your account. Finally, talk to your broker. We will assume that you let them know when they make a mistake, but also let them know when they do a good job. Recommend them to friends and family when appropriate. Remember that by being a good client, you will soon find that most brokers suddenly get better. After all, brokers are people, too. |
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