What type of broker are you looking for? Full service or discount. Which one should you use? In the old days a person would often locate a stock broker through a friend. The friend would claim his broker was a genius. More often than not, the friend would eventually lose money.
If you are just beginning to invest in the market, and you don’t know a lot about it, then a full service broker is the best way to go. You’ll end up paying some fees but you will receive the benefit of their expertise. If you are going to do all of the studying and analyzing of the companies yourself, then a discount broker is the choice for you. Handling your own investments might sound like a good idea. But many have found out that tackling the stock market is not as easy as some online stock brokers made it seem.
Going solo requires proper education in investments and finance. It requires knowledge of how to analyze a company’s financial statements thoroughly so that the process is indeed investing, and not gambling. For those that cannot or do not want to spend their free time crunching numbers and researching companies, entrusting their money to a qualified professional is their best option.
Stock brokers have passed state and federal examinations and can work for a stock brokerage firm that opens investment accounts for the public. While there are online stock brokers that cannot give investment advice to their clients – only open their accounts and take orders – full service stock brokers can give advice to their clients as to what investment to buy or sell.
Many of these full service brokers have taken a lot of heat during the last few years because many of their clients were hard hit due to their recommendations.
Some investors assumed that because their stock broker worked for a well-known stock brokerage firm, their money was safe. But an investor’s money is not just with the brokerage firm, it is being directed by an employee of the brokerage firm who could be great at investing or not.
Be aware that stock brokers are salesmen who meet their sales quotas. They do not keep their job because their clients are making money in their investments. They keep their jobs if their clients’ trading commissions and investment fees generate enough money for the brokerage firm they work for, even if the clients are losing money. This can be one of the greatest disadvantages of letting a stock broker manage your investments.
Another disadvantage is the fact that in order to survive as a full service stock broker, a person must open a lot of investment accounts and thus, have a lot of clients. It is not unusual for a full service stock broker to have several hundred clients after being in the business five or more years. When a broker establishes too many separate accounts, the biggest clients get the red-carpet treatment and the rest get short shrift.
There are also good stock brokers. You just have to do a lot of interviewing and ask a lot of questions. “What is your investment philosophy (that is, when and why do you buy a specific investment and when do you sell it)? Is an important question to ask.
1. Trading Commissions
Remember that the price per trade usually indicates the level of customer service that comes with it. There really isn’t a significant difference among the brokers charging $7 to $20. If you go much cheaper than that, you may have trouble getting someone on the telephone to answer questions, and if you’re paying much more than that, you should expect superior service.
2. Other fees
Brokerages usually charge fees for such actions as transferring assets into the account, fees for closing an account, IRA custodian fees, wire transfer fees, account inactivity fees, annual fees, and fees for not maintaining a minimum balance. If you know your needs, you won’t end up paying for services you don’t need.
3. Minimum initial deposit
Some brokers have account minimums, so find the one that best fits your budget.
4. Customer service
For many investors, customer service is important. Research a broker’s available services before signing. In the case of discount brokers, customer service includes website performance and interface. Check out each brokerage’s website and make sure it meets your needs. If talking to a live human is important to you, test their phone service. Is there an office nearby, just in case you need to talk face-to- face?
5. Traditional banking services
Many brokers now offer such banking services as money market sweeps, check writing and bill payment, Visa cards, direct deposit and ATM cards. Your money will often earn higher interest rates in a brokerage money market account versus the typical savings or checking account.
6. Research
Some brokerages market their research as a real plus, but there’s plenty of research available on the Web. Some of the offerings include analyst reports, real-time quotes, and detailed financial data.
7. Mutual funds
No-load mutual funds can be purchased directly from mutual fund companies, so the availability of thousands of mutual funds in one location probably shouldn’t affect which broker you choose. While you may purchase some no-load mutual funds from discount brokers without paying a transaction fee, some brokers do charge a fee for funds – so be sure to check on this before making a purchase.
8. Investment products
All brokerages offer stocks traded on the major exchanges, and most will offer equity mutual funds. If you’re interested in over-the-counter (OTC) bulletin board stocks or Pink Sheet stocks, make sure the brokerage offers them. Other choices such as options, government bonds and corporate bonds are not available through every brokerage.
9. Other methods of getting your trades executed
Sometimes you may not have access to a computer. Check out whether the brokerages you’re considering also have touch-tone phone trading, and how that works. Sometimes you just might want to place an order through a real, live person, and many discount brokerages offer that option, too.
10. Other freebies and perks
If you find yourself deadlocked which brokerage to go with, cash (or some other perk) can be a persuasive tiebreaker.
