The vast majority of all transactions are done by stock brokers, not your average joe investor. There is a broad range of brokerage services available. There are brokers who offer many services for aiding their clients meet their investment goals. No matter how much you think you can do your own research on what companies to invest in, these professional brokers will have entire departments – teams of highly skilled experts – that do research every day so you don’t have to.
Information, it seems, does not come cheap however, as brokers will typically charge high commission rates for every transaction. Whether or not you decide to use a full-service broker depends on your level of self-confidence, your knowledge of the stock market and the number of trades you regularly make.
2. Discount Brokers
Investors who wish to save on commission fees can use a ‘discount broker’. These brokers charge much lower commissions but don’t offer advice or analysis. Investors who like to make their own trading decisions and those who make many trades often use discount brokers for their transactions. Some traders may use both types – there is no reason why you can’t have two brokers.
The least expensive way to trade stocks is usually with an online brokerage. Both full-service and discount brokers usually offer discounts for orders placed online. Some brokers operate exclusively online and offer even better rates.
No matter what type of broker you choose, you must first open an account. Each broker sets their own requirements for maintaining an account balance but it is usually between $500 and $1000. When choosing a broker look at the fine print and find out about the fees involved. Some brokers charge an annual maintenance fee while other charge fees whenever your account balance falls below the minimum.
There are two basic types of brokerage accounts. A ‘cash account’ offers no credit – when you buy you pay the full amount of the stock price. A ‘margin’ account, on the other hand, allows you to buy stock ‘on margin’ – the brokerage will carry some of the cost of the stock. The amount of margin varies from broker to broker but the margin must be protected by the value of the client’s portfolio. If the portfolio falls below a specified amount the investor will have to add more funds or sell some stock. Margin accounts allow investors to buy more stock with less cash thereby realizing greater gains (and losses). Because they involve more risk than cash accounts, margin accounts are not recommended for inexperienced traders.
4. Choosing A Broker
Before choosing a particular broker the investor should carefully consider his needs. Does he wish to receive advice about which stocks to buy? Is he uncomfortable making trades on the Internet? If so, he should go with a full-service broker. Technology savvy investors who have the knowledge and confidence to make their own trading decisions are better off with a discount broker.
5. Shop Around
Be sure your broker is not taking advantage of you – some brokers do a lot of small transactions instead of one big one so they get slightly more commission. There can often be significant differences in costs when all the annual fees and brokerage rates are factored in. Try to gauge how many trades you expect to make in a year, how much cash you can deposit into your account, whether you wish to use margin accounts and which services you need. You can make more money each year just by having the right broker.
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