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How to Pick the Right Stock Broker
How to Pick the Right Stock Broker

You have a wealth of choices in how to buy and sell stocks these days, but you always need a stock broker.  Learn how to pick a broker who will give you exactly the service level you want and ensure you don't overpay!

Due to the financial markets deregulation that began in the U.S. in the 1970's and today extends into many countries around the world, investors have more choices of stock brokers than ever before.  However, with this wealth of choices comes the responsibility (some would say opportunity!) to choose just the right kind of stock broker to meet your needs.

Let's begin with explaining what a broker does.  While you do choose and hire your broker, it's important to remember and understand that they are, at the end of the day, a salesperson.   They work for a stock brokerage house who is out to make money for themselves and their sales staff (the brokers!).  The broker's job is to carry out your transactions.  Brokers are paid by salary, commissions on sales or a mixture of both.

In the U.S., to become a broker one must first pass two licensing exams called Series 7 and Series 63.  If they successfully complete these exams, the broker is then allowed to advise you, solicit business from you, and to execute your transactions for you.

Got that?  A broker can advise you, try to sell you, and do your trades for you.   Now that you know that, it's easy to understand the basic difference between a full service stock broker and discount stock broker.   Basically, full service brokers offer you advice and hand holding, whilst the discount folks just execute your trade orders and perhaps try to solicit more business from you.

Full-Service Stock Brokers

Full-service brokers usually offer a wide variety of financial products as well as investment advice and research.  They charge higher fees than discount brokers.  Full-service firms often offer bonds, derivatives, annuities and insurance in addition to stocks.  Full-service stock brokers solicit business from you (e.g., call you up and say 'I think you should consider buying such-and-such stock because...').  Importantly, these stock brokers are mostly paid by commissions. This means he makes money when you buy and sell stocks.  But he doesn't make money based on the performance of your portfolio or group of stocks making money for you!  So his or her interests are not necessarily very aligned with yours.

Discount Stock Brokers

Discount stock brokerages do not offer any advice or research - they just execute your trade instructions.  Because they don't have to hire expensive stock analysts and expensive stock brokers, discounters can charge considerably lower fees thatn full-service brokers.  Most good discount houses also offer online computer order entry services.  If you can handle ordering a book online from Amazon, you can use these firms online trading web interfaces - they are that easy.  If you need to, you can speak with live brokers at these firms - the brokers are paid a salary usually, not commissions, so they are just there to help you, not to encourage you to make lots of trades.

Sound too good to be true?  It isn't - you see, discount firms make most of their money by doing business in high volumes, competing mostly on price and the ease & reliability of their service. 

A Warning

If you receive a call offering you the chance to buy shares at what is claimed a great price and that you're going to make money quickly and the price might 'go through the roof', beware!  This is probably a 'boiler room' sales operation that is contacting you.  Boiler rooms are sales operations that fleece the unsuspecting public by pitching them to buy stocks that have little merit - but that the boiler room probably bought earlier at a cheap price.  Once they get you and others to buy in, driving the price up, they sell their position and leave you with stock that may well be worthless.  Boiler rooms often break many laws and are always closing down one office and opening another.

How to Choose Your Broker

It's essential that you determine the level of service you need.  If you aren't willing to do your own homework on choosing investments in the stock market, then a full service broker might be for you.  If you plan to mostly buy investments for the long term and hold on to them, then you won't be trading so often and the higher commissions won't matter so much in the big picture.  It's not going to sound high tech, but a great way to find a good full-service stock broker is by word-of-mouth recommendations.  Ask your friends if they know of a great broker, or know someone who would know a good stock broker.

On the other hand, if you are planning to trade more often, then you really should only be doing this if your investing your own time to carefully research & choose your trades - and, in this case, discount brokers are ideal for you.  They give you the lower costs of trades, which matters a lot since you'll be trading more often.

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Creation date: May 15, 2007 1:29pm     Last modified date: May 16, 2007 6:27am   Last visit date: Jul 20, 2024 1:57am
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