Who Exactly are Stock Brokers and How Do They Function in Our Online World?
All stock transactions are made through stock brokers. So it's important to have a basic understanding of who exactly they are and what they have to offer.
Who They Are
An investor doesn't actually buy and sell securities directly. She does it through an agent or middleman that carries out the transaction on her behalf for a fee or commission. This agent is called a stock broker.
You will also hear the term brokerage which is sometimes used interchangeably with broker. You can think of the brokerage as a firm and the broker as an individual.
Types of Brokerages
- Full-service: Besides carrying out your transactions, full service brokerages offer a lot of extras like a wide variety of financial products, personalized investment advice, retirement planning, and tax tips. However, they tend to be expensive -- fees per trade made over the phone could be around $120. Morgan Stanley, Merrill Lynch, Smith Barney, UBS are all examples of full-service brokerages.
- Discount: The most attractive feature of a discount stock brokerage is low commissions on your trades. They typically do not offer investment advice. Charles Schwab is a good example of a discount brokerage.
- Online: This actually isn't a separate category. Almost every brokerage worth its name, full-service and discount, offers online trades. As an investor you have complete control over your trades -- you place your trades online by yourself.
How to Pick Your Stock Broker
- How much interaction do you need? Do you need to talk to a "live" person to execute your trade? If so, consider either a full-service or a discount broker that offers this option. If you're comfortable trading online, both full-service as well as discount brokerages offer this option.
- How confident are you about making your own investment decisions? Do you need investment advice? Only full-service brokerages offer this. If you make your own investment decisions, go with a discount brokerage.
- Cost: Discount brokerages charge low commissions. Among discount brokerages themselves there is a fair amount of variation in price. So weigh cost in with the other criteria covered here.
- Minimum deposit: Brokerages usually require you to have a minimum account balance. Some discount brokerages also offer lower commissions or even free trades once your account has crossed a minimum threshold.
- Customer Service: Your potential brokerage should provide quick response both over the phone and to emails. Do some research on this -- look at customer reviews, rankings by reputed financial publications, etc.
In summary, we talked about what brokers do and discussed their offerings, namely full-service, discount and online. We wrapped up with some important selection tips.
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