What is a Stock Broker?
Before we tap into the function of buying and or selling “securities,” let us take a quick look at what securities are? First of all a “security” is a type of investment. A type of “ownership” investment, to be precise, it entitles the holder/buyer the right to “ownership” of the debt, which has a certain value that can be sold for profit/gains.
Shares, stocks, bonds and options are examples of securities.
A “new” investor may find that the stock market buying and selling may be a little too overwhelming. However, they would like to perform the function of buying and or selling shares in the stock market to profit. It is in a potential investor’s best interest to enlist the help of brokerage firms.
What are Brokerage firms?
The essential function of the stockbroker or brokerage firm is to carry out its clients’ demand. For example, if I hire a broker from Morgan Stanley to shape out a financial plan for me because I am unsure of how to manage “risk” in my portfolio, then Morgan Stanley’s associate will undertake this function to meet my financial needs.
[pullquote]Shares, stocks, bonds and options are examples of securities.[/pullquote]
On the other hand if I am an incredible stock market analyst I will hire Morgan Stanley to carry out my demands, so if I say I want to buy 100 shares of Apple at so and so price, then my broker will carry out that demand. Brokers are paid in the form of commission. (Much like your average real estate broker)
There are essentially three types of brokerage firms out there:
1) Full Service Brokerage Firms
2) Discount Brokerage Firms
3) Deep discount Brokerage Firms (aka internet brokers)
Full Service Brokerage Firms
This type of “brokerage firm” falls under the more traditional category. They deal with giving you “investment advice” in buying and or selling securities, and they recommend what type of shares, or company to invest in. These full service brokerage firms do not come cheap; they are known to procure high commissions from rich investors who do few trades.
They are full service because they take care of the client’s complete portfolio. They work on commission based on the buying and selling of the client’s shares/stocks. Classic company examples of full brokerage firms are Merrill Lynch and Morgan Stanley.
Discount Brokerage Firms:
The term “discount” is always a best seller in the advertising industry. It has the power to attract a reasonable sized audience. Oftentimes Full Service Brokerage firms like Morgan Stanley literally charge $100 per trade, and sometimes not all investors are willing to let go of such cash. They resort to the cheaper alternate, and these Brokerage firms are the discounted ones.
They charge low rates of commission because they do not offer the full-fledged ‘investment” services. They are there to answer any questions related to investments.
Traditionally, these companies would let their client pick the stock they wanted to invest in, now they have their own ratings and recommendation services. The experience however, is less personalized. They would charge around $10 per trade. In today’s day and age of technology this option is preferred because the end user may change orders, buy or sell online or through an automated telephonic system. The client may also keep track of the trade at any given time, and be informed of ‘real time” prices etc. A good company example would be Charles Schwab.
Deep-Discount (aka internet brokers)
This type of brokerage firm emphasizes the need for technology. They are the lowest when it comes to “brokerage fees” because they minus all the personalized services of “full service brokerage firms.” Information concerning stock prices, research, and other market information is free if you are a member of the company.
The benefit of using this type of brokerage is the cheap fees and you can have access to stock market information on the go. Deep discount brokers are also referred to as “internet brokers.” These companies charge as low as $5 per trade. An example is Scottrade.
What can you expect to pay for each?
Full Service Brokerage: Up to $100 per trade
Discount Brokerage Firms: As low as $10 per trade
Deep-Discount Internet Brokers: As low as $5 per trade
(On a side note Companies that are Full Service offer you personalized packages and financial advice concerning the buying and selling of securities, whereas Deep discount companies offer you market information that you use as deemed fit, hence there is nothing personal about it. This is perhaps what causes the extremes in trade fees (commissions). Another factor is that deep discounted companies rely heavily on technology on the go, whereas Full service lets you have your own broker or financial advisor who takes care of your portfolio. This is why both ends of the spectrum vary)
Make sure to Visit the Wall Street College’s Deals Page to find great offers we got for you for opening a brokerage account!