Are You Ready For A Broker With A Heartbeat?
Let's face it, folks: Nothing sounds quite as tasteless as a conversation about what your "broker" told you over the phone last week.
When you're talking to normal people to whom investing isn't a hobby, a passion, or even something they think about, talking about what your broker told you is a bit akin to dropping the name of some B-list actor you once had drinks with while laid over in L.A.
Nobody wants to hear it. Even in my own office, surrounded by people who have been in financial journalism for decades, using the B-word puts you a few notches higher on the Grand Totem of Douche.
And when considering the practical drawbacks of buying and selling securities through a live broker — like the absurdly high commission rates — it begs the question: Is it worthwhile to even bother with one?
Well, in my experience, yes. Absolutely.
But not for everything.
When I first started trading stocks, I did so only because the magic of E-Trade had made it easy and accessible enough.
I traded Nasdaq and blue-chip companies, along with some smaller ones — but always stocks with enough volume that buying and selling what meager shares I could afford was never an issue.
For me, the convenience and electronic comfort of being able to trade with the click of a mouse was a selling point.
And with trade commissions at less than $10 per trade, I don't see any issue with relying on your brand-name online brokerage systems like E-Trade and Scottrade for the bulk of your stock-trading needs.
Of course, then I started to trade like a pro, and everything changed.
Want to Race? Learn to Drive a Manual
Going from amateur to pro always carries with it an escalation in skills required to stay alive.
When I first started trading Canadian Venture Exchange stocks — which is the exchange of choice for some of the best and most prospective small companies today — my trusty old electronic account simply wasn't going to cut it.
Yes, you can buy Canadian stocks or their American analogues through online brokerages, but I quickly noticed a problem when I started trading these stocks.
When volume was thin enough, my trades simply wouldn't go through. And to make them go through, I would have to do the one thing that makes a trader sweat: raise my bid or lower my ask.
Either way, by cutting into my potential profit margin, I was losing money.
As I was learning the ropes of microcap stock investing, I was also building my network — and right around the time that I was figuring out the mathematical mechanics of the game, I was introduced to my first live broker.
I'm not going to give you his name or where he works, but in the nucleus of the microcap universe — Vancouver — he is a good person to know, to say the least.
His commission rate of between 1% and 2%, depending on position size and stock price, was high.
For my bigger trades, I was paying literally hundreds of times more to get shares into and out of a position than I would have using my flat-fee Scottrade account.
But the benefits quickly became apparent, too.
Earning His Keep
First and foremost, he could move shares. It should technically not matter if I was trading electronically or not, but it did.
Even with light volume and apparently little to no buying stimulus, he just did better than E-Trade ever could, saving me on the margins even as he charged his big commissions.
I quickly realized that what he saved me on my bids and asks outweighed what he cost... and that was just the beginning.
My broker wasn't a salesman — not like the kind you see in the movies that cold-calls you and starts pitching a stock you've never heard of.
But he did every once in a while send me an idea. He'd tell me about companies with interesting things going on — information that wasn't private, by any means, but information few people ever got to see because of the intimate nature of the Venture Exchange.
And if I came to him with an idea of my own, he'd quickly run it through his own mental checklist and fire back an opinion within minutes, giving me the benefit of decades of industry experience.
Again, he never sold me on anything. He never made me do something I didn't want to do. He simply guided, giving me more to think about than I ever would have by just clicking Yahoo Finance links or staring at metrics I could barely understand.
Graduate School for Trading Should Pay for Itself
In essence, he taught me how to trade by helping me to avoid rookie mistakes.
He taught me how to trade in a slower, more measured manner. He taught me not to chase. He helped me develop something no young man can ever have too much of: patience.
He was a mentor of sorts and a professor... And while this does not explicitly come with the job description, this sort of personal care is something I would expect from anybody in his position.
Knowing him, of course, doesn't hurt when it comes to getting to know others in the business — and if you want to become really serious about investing, networking is an invaluable tool.
Do you smell the beginnings of crony capitalism here? No, I don't think so. Every industry has its pros and its amateurs. And when you put in the time and effort to become a pro, you reap the benefits.
There's nothing unfair or nefarious about it.
So that's my take on it. But remember this: that's only my take. If your goal is to trade Apple and Google on the dips and bounces and make a modest but safe profit, you're probably good where you are.
For those who want to take the next step, however... maybe it's time you give going live a bit more thought.