A great way to build wealth through investing is to open a brokerage account – and many people are doing just that. But in some cases, there are pitfalls and traps in the account set-up and the conditions, which can work against you if you decide to trade more often, to withdraw some of your balance, or for instance, if your broker goes bankrupt. Being aware of those can save you a lot of headaches and money problems.

The content of this post does not constitute financial advice. It is intended for educational purposes only.

1. leverage

Leverage in trading is essentially there when you are allowed to acquire a much larger exposure to an instrument than your (much) smaller equity investment in it. Leverage can be a great enabler in terms of opening bigger positions than you can afford, but it is a double-edged sword: it can magnify your profits and your losses. So while you could be earning a higher return on your capital with a leveraged position than if you had opened an equity-only position, when the markets move unfavorably for you, the losses will also be higher. That also means that a much smaller move in the market is actually required to wipe out your capital than if you did not use leverage.

One should be careful to check at the time of account opening or position opening, what the leverage settings are. There are brokers out there who set it globally unless noticed and adjusted, at the time of the opening, which a lot of people might miss or ignore. Others have an automatic setting for different types of instruments which is visible in the trading conditions, or at the time of opening the trade. Hence, it is important to read carefully before executing the trade and look for that information and ensure it is aligned with what you actually want to do – generally speaking, you should probably avoid taking on more leverage than your risk tolerance or your goals would warrant. For instance, there are cases where brokers put you on 1:100 by default, which can be too much for a lot of people.

It is also important to keep in mind that leverage is embedded in certain types of instruments – for example, in contracts for difference, spread betting products, or many derivative instruments, such as options. There is a tragic case from a few years ago, where a 20-year-old university student in the United States took his own life, after seeing a huge negative account balance (-$730,165) in his Robinhood account, as a result of trading stock options and not fully understanding how they work and how much they can leverage up his position. If one does not know how a particular investment product works, one should not engage in trading without fully comprehending the risks and how to manage or avoid them. In such situations, leverage can be extremely dangerous.

2. funds protection

When choosing a broker, one of the things you should consider is whether there is a strong regulatory regime in the region or country that is the broker’s jurisdiction. This is a backstop against losses in cases of bankruptcy or fraud, which in some spaces can be more common than others. Developed countries usually have strict requirements, even for online brokers, that involve guarantee schemes ensuring the return of investor funds, usually limited to some amount, similar to deposit protection schemes but applicable to securities and cash balances held with brokers.

Country	Investor Protection Scheme	Protection Limit
United States	Securities Investor Protection Corporation (SIPC)	$500,000
United Kingdom	Financial Services Compensation Scheme (FSCS)	£85,000
Germany	Investor Protection Scheme (EdB)	€20,000
France	French Deposit and Resolution Fund	€70,000
Italy	Investor Compensation System	€20,000
Spain	Investor Compensation Scheme	€100,000
The Netherlands	Investor Compensation Scheme	€20,000
Poland	KDPW Investor Compensation Scheme	€20,100
Switzerland	Depositor Protection Scheme	SFr. 100,000
Ireland	Investor Compensation Scheme	€20,000
Cyprus	Investor Compensation Fund	€20,000

However, one needs to carefully read the agreement when opening an account. Some brokers do not just hold balances and securities in their jurisdictions but allocate them to accounts with institutions in other countries or investment funds subject to different requirements. In such cases, there might be situations excluded from the protection coverage, and the broker might even specifically highlight them in the agreement.

Also, keep in mind that for investor protection to get activated, a claim needs to be submitted usually, proving one’s holdings and the occurrence of the events or risks under which it can be applied. But generally, no matter where you live or what citizenship you have, if your broker is a member of such a compensation mechanism and the conditions are met, you will still be entitled to a payment according to their rules. Some brokers might even have additional insurance in place for specific types of risks, which increases the likelihood that you will be compensated accordingly.

3. interest on unused balances

Uninvested cash sitting in your brokerage account could lose out because of opportunity cost. That may not have been the case last decade with record low, even negative rates in some places, but today many low-risk options for cash could yield at least enough to cover inflation, if not more in some countries. Many brokers offer some kind of a cash management program that can compensate you for holding cash there, with the rate dependent usually on some condition – either holding period, total invested funds plus cash, or size of the unused balance, etc. The rate could be fixed or variable and could be rising progressively depending on the amounts. The conditions must specify how such a program works, under which circumstances it may not be applicable or you may not be able to take advantage of it, what the withdrawal limitations are, and what the annual percentage yield is. There could be minima applicable and your cash might be held at other institutions or even in other countries – do not forget to confirm that and how much liability your brokerage retains. There might be also tiers within the cash program that provide different levels of protection and complexity of the interest rate determination.

4. special orders: limit, take profit, or stop-loss

With some brokers, the execution of limit orders could be problematic. They could suffer from technical problems, preventing execution on time and at the best possible price, or they might have inadequate software or trading systems. This could be costly for you if the price slips too far away from your limit. Additionally, one needs to make sure how the mechanisms for take-profit and stop-loss limitations are designed and applied. There are brokers where the take-profit order cannot exceed a certain multiple of the position size, while stop-losses, which are a very useful tool in risk management, may be blocked or limited. In my opinion, this is usually a sign of a lack of good faith on behalf of that particular institution, as they handle things in ways that work in their favor. The more freedom you have and the better the execution, the more trustworthy the broker is.

5. income reinvestment

If you do not need the cash from regular investment income, such as stock or fund dividends, then check whether your broker allows the option to choose automatic dividend reinvestment. Some of the biggest and most reputable brokerage companies provide such a choice, where you can make a selection whether you would prefer to receive dividends in the form of cash or to put them back into the same instrument. Generally, this has the potential to enhance your returns over time. In most cases, this is a setting in your account that is set for the entire portfolio – or more precisely, for those instruments for which it is available. It is possible that, for some types of investments or those from certain countries, the broker might not allow automatic reinvestment at all. This also applies to other types of distributions, for example, coupon payments coming from bond ETFs. One thing to be mindful of in case you do choose to reinvest is the reinvestment risk – i.e., you might not be able to earn as much on the reinvested cash flows as you had been expecting at the onset of the original investment.

6. withdrawal periods and fees

There is probably nothing more frustrating than when you want to get your money out, as fast as possible, and you can not. Hence, there are a few key things to keep in mind when you review the withdrawal policy of your broker.

1. Restrictions
In their terms and conditions, your broker is obliged to highlight all instances in which they might not allow you to withdraw your funds – change or ownership of payment method, identification failure, suspected fraud, etc. It is important to know that when a withdrawal is requested, in jurisdictions with strict regulatory requirements for anti-money laundering and fraud prevention, a very rigorous compliance check might be performed after you submit the request. This would be especially the case if the broker’s risk department has noticed certain red flags in your trading activity. This could slow down, or in extreme cases – even block any money transfers you might be hoping for. You are of course entitled to ask for additional information, though in some cases you might not receive very useful responses. Brokers can also leave the door open to apply other limitations for non-specific cases – they usually phrase that as “it is at our discretion in which circumstances” – so it is important to be aware of this.

2. Third party transfers
Again, in very regulated regions, those might not be allowed at all, and only your own accounts might be accepted – for both deposits and withdrawals.

3. Currency of withdrawal
Some brokers will allow you to perform a withdrawal in at least several currencies other than the main account currency, which can be very useful. In such cases, check how they do auto-conversions and what exchange rates will be applied – you might find this to be a rather costly option. For others, you might only be allowed to withdraw in the account currency.

4. Processing time and transfer time
Usual processing times could take up to several days, but in some cases, it could be more – this depends a lot on the broker, and there may be other conditions that determine this duration – hence, their terms and conditions should be carefully reviewed. It is also possible that the broker uses other financial intermediaries for the payments, in which case the transfer speed might not be in their control at all. In fact, there might be a part of your agreement with the broker which states that the bank or payment intermediary can hold the withdrawal and during that period, the broker has no responsibility for it and does not consider it as part of their uninvested cash program.

5. Charges
One should pay close attention to how fees for withdrawals are applied and calculated. In some cases, they could be fixed amounts only, but in others, it could be a percentage of the sum or an even more complex formula – e.g., a minimum of a fixed amount or a percentage out of a certain specific calculated amount that does not equal the withdrawn amount. The more complex this fee is, the bigger the red flag.

7. various trading costs

There are numerous types of fees that brokers can apply, and they differ across companies, instruments, types of trades, etc. For instance, for some types of transactions (e.g., stocks from specific countries), there might not be any commissions on opening or closing a position, while for others (e.g. derivatives on them, or special types of investment funds, or contracts for difference), there can be commissions. Brokers also target certain bid-ask spreads (i.e., the difference between prices at which you can buy a given instrument from the broker and the price at which you can sell it) per classes of investment products, which incorporate their own mark-ups (i.e. what they add on top of the bid-ask spread of their liquidity providers). This is also an often forgotten cost by newbie investors, but can be quite critical and, when there is stress in the markets, these spreads can widen significantly. Margin trading and short selling also involve additional costs, as there is a borrowing cost. This is usually indicated when you attempt to submit an order on your trading page or app. Some of the most common costs to keep in mind and review before opening a brokerage account and trading are in the list below. In many cases, these are not indicated in the terms and conditions, but rather in different places on the websites of the brokers, and some may not be obvious at all and could even be hidden in small print.

8. contract types

One must exercise extra care when it comes to the contract being executed when opening a position. For instance, many brokers use like company logos or icons with logos to denote the individual company or the fund. One may be misled by that and think they are, for instance, simply buying a stock, when in fact it is an ADR (American Depository Receipt), a CFD (a contract for difference), a future, some other derivative or a spread bet product. This can affect you not just because of the actual exposure you get (some of these contracts are very leveraged) but also because the way some of these work can be more complicated or can involve large costs that do not apply to the actual underlying asset (e.g., the stock itself). Scam brokers can deliberately note such details in small font and similar pictures so you will not notice the difference and go for the much riskier instrument, which could even show up on top in the search function (again, by design).

9. incorrect price feeds

If you compare prices available for the same instruments at different brokers, large financial institutions, as well as large financial data service providers (such as Bloomberg or Refinitiv), you might notice differences. Most of the time, when the market functions normally and there is no spike in volatility, such differences would be small. But when major turmoil events occur, price movements, especially for less traded instruments, could start behaving erratically. Brokers generally work with large market participants (e.g., big banks, major financial institutions, and other entities) who are their liquidity providers. What that means is that these institutions create a market in a given segment and make that market liquid by constantly buying and selling financial instruments and currencies, providing brokers with price feeds and the ability to execute orders. Thanks to such relationships with liquidity providers, brokers can send their clients’ trades to the market (and collect a fee), in a Straight Through Process (STP) model, or they can also take the other side of the trade and make the market themselves (with many brokers combining the two in a hybrid model).

However, the transmission of these price feeds is not always perfect and can have delays or faulty readings being sent out. In such cases, the client could see one thing in their Bloomberg Terminal or in Yahoo Finance, while their trade could be executed at a completely different and not-so-favorable price. As a result, your trades might not be executed correctly, or at all, or you might be having closed trades at losses when this should not happen. This is not easy to foresee but is more likely when there are rapid moves – spikes or drops in the market. Some brokers could have written policies or advice for these occasions, but usually it is better to contact customer support at the brokerage firm, highlight the discrepancy and the affected positions in your portfolio, and ask for correction or reopening – which should usually be possible.

10. Copy Trading

Copy trading has become a widely available option for novice traders and investors at many brokers. It is popular because it takes away some responsibility from those who are not professionals and do not have the time to do their due diligence and research on their investment opportunities. With copy trading, a given investor’s strategy is automatically copied for other investors’ accounts. The idea is to copy someone more knowledgeable or successful so that you can benefit from their ability. However, it is not so straightforward and can involve some major risks.

First, finding who to follow and verifying they actually know what they are doing, not just short-term, but also in the long run, is certainly a challenge. On top of that, you have the problem that the way they are running their portfolio might not be suitable for you and your goals and risk tolerance. You still need to make sure you fully understand their strategy and its risk scoring, and how it can perform (or underperform) in various market conditions, otherwise, you might be unpleasantly surprised when volatility hits or a recession occurs. And never forget that past success is no guarantee for future performance.

Second, there are a host of risks associated with liquidity and the algorithm doing the copying. When there aren’t enough buyers or sellers in the market for a particular asset, this could cause the trade the execution of the copy trade to happen at a completely different price point from the original trade. If the copy algo is not correctly programmed or cannot handle various market situations or trading obstacles, then proper execution might also not occur. Third, copy trading limits your learning and can give you a false sense of security and confidence in the markets. Additionally, it can prevent you from properly running your intended risk management strategy.

Finally, make sure you understand the exact mechanism that your broker specifically uses to execute copy trades, as it may differ from others. That means, knowing how the amounts are determined, when trades will not be executed, how automated position modifications work, and what safeguards, if any, are in place.