Picking a broker can be no different than selecting a dentist: potentially painful and expensive. However, if you're reading this, you're probably looking for a practical, no-nonsense way to start investing. Until now, you may have only considered going through your bank. It is an obvious and convenient choice, but not necessarily the best one. Banks typically offer limited investment options and charge high fees. Since managing investments is not their core business and they have overhead costs like rent and salaries, their services often end up being costly and restrictive. The good news is that better and more affordable alternatives exist. These options provide greater flexibility, lower costs, and help you make the most of your money.

What exactly is a Broker?

A broker is simply a company that buys and sells securities on your behalf. In our case, it’s the company allowing you to buy shares of public companies, bonds, currencies, derivatives or ETFs (for their definition see here). When choosing a broker, there are several key factors to consider to ensure you make the best decision for your investment goals. Here’s a breakdown of the most important things to evaluate:

1. Fees and Costs: commission fees, account fees, and other costs can significantly impact your overall returns. The general rule is: the lower the better. Pay close attention to hidden fees, such as inactivity fees or transfer fees, and compare them across different brokers.

2. Market Access: consider the range of assets available for trading, including stocks, bonds, ETFs and options.  Ensure the broker offers access to the markets you are interested in, both geographically and in terms of order types (e.g., market orders, limit orders, stop-loss orders).  A wider range of options provides greater flexibility in your investment strategy.

3. Platform and Tools: the trading platform is your gateway to the market.  Look for a platform that is user-friendly, intuitive, and that potentially offers research tools. A robust mobile app is also essential for managing your portfolio on the go. Consider features like portfolio analysis, news feeds, and educational resources.

4. Regulation and reputation: security is paramount.  Ensure the broker is regulated by a trusted financial authority, such as the SEC in the US, the FCA in the UK, CONSOB in Italy or the JFSA in Japan.  Check online reviews and ratings to gauge the broker's reputation and client satisfaction.  A well-regulated broker offers greater protection for your funds.

5. Customer Support: responsive and helpful customer support is crucial, especially when you encounter issues or have questions.  Evaluate the availability of support channels (phone, email, chat) and the quality of service provided.  Look for brokers that offer multilingual support if needed.

6. Tax Reporting: ensure the broker produces the reports needed for tax compliance. For our Italian resident readers, for example, it might be beneficial to choose a broker that offers a “sostituto d’imposta” o “regime amministrato” service, which automatically deducts taxes on your behalf, making tax season much easier.

Start by defining what’s most important to you as an investor. Are you looking for low fees, specific asset access, or advanced tools? Prioritize the factors that align with your investment goals and personal preferences. For most beginner investors (and probably for more advanced ones too), a simple, cost-effective solution is likely all you need.

Our choice

“I’m sure you did your homework, so talk!” After researching our options, we primarily worked with two brokers: Interactive Brokers and Saxo Bank, both reputable and well-regulated. Interactive Brokers offers a professional grade platform, lower fees and a broader range of trading products, making it ideal for active traders. Saxo Bank provides a more user-friendly platform with better customer support and educational resources, appealing to both beginners and less frequent traders (long-term investors). For our Italian readers, it is worth noting that BG Saxo, the local subsidiary of Saxo Bank, offers the “regime amministrato”, simplifying tax declarations. This can be a significant advantage for those who prefer a hassle-free tax process. Both brokers are excellent choices, but the best option depends on your level of experience and specific needs. Regardless of your choice, both require a thorough registration process to verify your identity and comply with regulations. Once completed, you will have access to your online trading account.

Our personal experience with Interactive Brokers was excellent, and we would highly recommend it to anyone. However, as soon as we moved to Milan, we switched to BG Saxo because we wanted to focus on investments rather than handling tax reporting. We are not sponsored or affiliated with these platforms, but if you would like to follow our steps and earn a reward, subject to their changing terms and conditions, while supporting this newsletter, feel free to sign up using our referral links.

Practical Operations

For the purpose of this newsletter, we will use screenshots from Interactive Brokers.

In “The Foundations of Wealth”, we were discussing the average returns of the MSCI World. To purchase it you first need to notice that being an index you need to find an ETF replicating its composition. If you don’t know where to start, you can go here: https://www.justetf.com/en/search.html?search=ETFS and select “MSCI World” as Matching Indices and you will get something like this:

Not surprisingly the performance is quite similar as all these funds are replicating the same index, i.e. investing in the same underlying companies, but then there are four key variables to consider: Fund Size, TER p.a., and Distribution. Fund Size indicates how big is the fund: in this case bigger funds are usually better as more liquid. TER p.a. stands for Total Expense Ratio per annum and is probably the most important variable to consider here: it represents how much money you will pay to hold this fund so the lower the better. Finally, Distribution can be either Accumulating (the fund re-invest its income) or Distributing (you receive a periodic income): whilst the latter may sound appealing, from tax purposes for long-term investing Accumulating is usually to be preferred. If you are resident in Europe you may be constrained to invest in so-called UCITS ETFs, so make sure that the one you select as UCITS in its name. From the screenshot, it seems that the cheapest relatively big, accumulating ETF replicating is SPDR MSCI World UCITS ETF (it may be useful to take note of its ISIN, which is a unique identifier, IE00BFY0GT14.

Hence, let’s type in the search bar of our online brokerage platform its ISIN (i.e. IE00BFY0GT14) and we should be able to see multiple options. Each option represents a different stock exchange: there are criteria for which one may prefer one over the other, but for our purposes probably the only variable would be the currency. Here it’s completely up to you, but for the sake of the argument let’s have a look at the USD ETD listed at the London Stock Exchange (if you live in Europe you may prefer the EURO denominated one, but once again it’s up to you). Anyways, you will see with something similar:

As per “YAIN Investment Philosophy”, we are not traders so after all our careful analysis we should not bother much about the data here. What is important for you to understand is that Bid represents how much someone is willing to pay to buy one share and Ask how much someone is willing to get to sell one share. Then you just need to press “Buy” to get this screens:

Quite intuitively, Quantity represents how many shares you’d like to purchase. Order Type will give you mainly two options: “Market” (i.e. you pay whatever last price is available to purchase the quantity you selected) or “Limit” (i.e. you specify the price you are willing to pay for the selected instrument. Given that  most brokers do not give you access to real time data, we strongly recommend to always use Limit orders specifying the price you are willing to pay (on top of which you should add the broker commissions). Finally, Duration represents how long your order will stay there, looking for someone else willing to sell: in this case as we are patient investors and not day-traders, once you come up with a price on which you are comfortable to buy something you can select GTC (or Good Till Cancel) which basically means that your order will stay there until you cancel it.

Hence, the above means that you are willing to buy 1 Share of SPDR MSCI World UCITS ETF for $20 until you cancel the order. Given that the current price of this instrument is in the region of $40, your order is likely to stay there until the market crashes 50%. Hence, make sure you pick up a reasonable price or if you pick an outstanding business you may end up looking at its price to grow without owning it (this is mostly a reminder to myself). By the way, congrats on your first purchase!