Friday, November 20th, 2009
Choosing a Stock Broker
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Stock brokers may not have the cleanest reputation in the financial industry, but they provide a vital connection to Wall Street for individual investors. Fortunately, the days of expensive brokers utilizing high-pressure sales tactics are in the past as the Internet has given rise to a new breed of so-called discount brokers.
What Does a Broker Do?
Brokers are responsible for handling customer orders to buy or sell securities and act as a middleman between individual investors and Wall Street exchanges. Stock brokers in the United States are regulated by the National Association of Securities Dealers (NASD) that helps to ensure that they have a strong base of knowledge and adhere to strict ethical rules.
All brokers work on a commission basis, which means that they are sales people at heart. Cheap brokers charge $5 to $15 per trade to simply effect the transactions, while expensive brokers can charge upwards of $200 a trade to provide advice on which stocks to purchase. Some brokers also charge a percentage fee if trades are made on OTC exchanges.
Types of Brokerage Accounts
There are several types of accounts available to investors when setting up a brokerage account, including:
- Standard Account. Standard accounts generally have a minimum deposit amount, but represent the most basic form of account available. These accounts typically allow customers to trade any exchange-listed stock.
- Joint Account. Joint accounts are those shared between couples, partners, or others wishing to combine funds. Investment club accounts are setup by official investment clubs and involve group investment decision making.
- Roth/Traditional IRA. Roth and Traditional IRA accounts are retirement accounts that carry certain tax advantages compared to standard accounts. These tax benefits typically include the deferral of capital gains taxes.
- Options Enabled.
- Futures Enabled.
How to Choose the Right Broker
Choosing the right broker depends largely on your investment experience and account needs. However, here are a few guidelines to help you choose:
- Experienced Vs. Inexperienced. Experienced investors should consider using discount brokers, especially if they are active traders. Meanwhile, inexperienced investors may want to consider using a full service broker that can help ensure that your stock portfolio is well-balanced and suited to meet your investment objectives.
- Investor Vs. Trader. Often times, traders will place many more trades than investors, which means they will want to seek out discount brokers in order to reduce the cost of doing business. Meanwhile, investors may be willing to pay more in exchange for access to proprietary research or other professional services.
- Lean Vs. Feature-Filled. Traders looking for real-time quotes, charting and other tools may want to seek out brokers that offer these tools online. Meanwhile, investors may be looking for something much more simple, as the commissions and fees are generally lower for simpler setups.
Important: If your broker is not a popular nationwide brance, it is important to check its background before setting up an account. The Central Registration Depository (CRD) is a disciplinary database available from the NASD that contains information about unscrupulous brokers. Free online searches can be performed on their website: http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=469.
Key Points to Remember
- Brokers are middlemen that allow individuals to trade with exchanges on Wall Street.
- Choosing a broker should be a function of your individual needs.
- Most investors will benefit from an account with a discount broker like Scottrade.com.
Written by Simon Monger
