Choosing a Broker

Choosing a Broker

Choosing a Broker - As a new investor choosing the right broker is one of the most important decisions you will make for your investment interests. To start there are two options of brokers to choose from: full service or traditional brokers and discount brokers. If you choose to open an account at a brokerage firm; you will work one on one with a stock broker to handle your account and investments. They are the ones that help you develop a portfolio. A portfolio is a compilation of  all the stocks you own and information about them put into central location like a folder as your account.

The full stock broker will offer you investment ideas, prepare reports for your portfolio, give you a run down on how your investments are doing and is available for you by visit, phone or however you need them. They also offer research sources (they will look for investment opportunities that are good for you ). In exchange for all this one on one service you do have to pay a commission which can be high at times. Examples of such brokerage firms would be Merrill Lynch (now part of Bank of America), Morgan Stanley Smith Barney, and Wells Fargo Securities. (*Note: Many of these companies offer both full service and discount options based on your needs and personality.) 

Discount brokers are geared for the "do it yourself" investor. The discount broker generally does not offer advice on investing. All they do is execute the wishes you have in regards to buying or selling a particular investment that you have. Most of your trading with these kind of brokers are on line. If by chance you decide to call in an order with discount brokers; it's with whatever broker is available on the phone at the time of that companies service. 

Recently discount brokers have been offering research that has been competitive to the full brokers and brokerage firms. Examples of discount brokers are E-Trade, TD Ameritrade, and Scottrade to name a few. In exchange for giving up personal contact with a regular broker, investors will be charged a significantly lower commission. 

The major difference between traditional brokers and the discount broker is the cost of money for each transaction. You can also see  that there is difference in price for commissions between traditional brokerage firms and the discount brokers for performing some of the same type of transactions as well. Prices vary among discount brokers too. For instance, you may find a discount broker who charges $30 dollars a transaction and another who charges no more than $8.00. 

Like anything else you spend your money on; you have to shop around for the best you can get for your dollar and that means brokers too. Sometimes higher commission fees mean better service. It may mean that your request is carried out at a much faster rate which can make a difference in the trading arena. For example, your  orders to buy or sell a stock may be carried out quicker when you pay more which can be crucial based on the market. There may or may not be other perks too. Like I said you have to investigate and shop around for the best broker to suit your needs. 

Every broker has a minimum balance requirement to open an account for you to start your trading. Most are around $1000 to start and some do go as low as $500. There are those that start higher also. The rule of thumb with investing is however ; you should have at least $1000 to start with. Be careful because some firms may offer a start up account at a low fee but get you on account maintenance  if your account falls below a certain level. Also keep in mind that although the fees per quarter may be low also; like in some cases from $5 to $15 it can eat up your investment returns. Case in point; $60 a year in fees for an $1000 account balance equals to 6% interest. 

Every broker will offer different tools, perks and research to their clients. In some cases the broker will allow you instant online access. This enables you to print out an analysis of your portfolio, view your account balance  for at least the past 6 months, check your realized and unrealized gains, and view your dividend research for the past few years. Others may not have these features but offer the best research available in investments. If how fast a broker executes a request is important to you then you need to also consider that brokerage's firm's policies. Online discount brokers claim to execute your request in less than 60 seconds or less or you will not be charged a commission. 

Brokerage firms offer different types of accounts. The common ones are cash accounts, margin accounts (also called cash and margin accounts) and option accounts (also called cash, margin and option accounts). The difference between these accounts are basically the level of credit and trustworthiness that the feel the client has based on the brokerage's evaluation. 

A cash account is one which is considered a traditional brokerage account also known as a Type 1 Account. With a cash account/Type 1 Account you can make trades but have to pay in full for all purchases by the settlement date. So what this means is if you do not have sufficient funds in your account to make a purchase you have to add to that account to be able to do so. In the past the brokerage firms would buy the stock for you if you were low in your account and give you a few days to bring in the money to settle the trade. Now because of internet trading most brokers want the money in the account in order to buy for you. Some brokerage firms require $10,000 to open up a cash account. 

A margin account is one that allows you to take loans against securities you own also called a Type 2 Account. Because essentially the brokerage is fronting you credit you have to pass a screening procedure by that firm to get this type of account. Even if you do not plan to buy on the margin if you plan to use short sales (*In finance, short selling also known as shorting or going short is the practice of selling assets, usually securities  borrowed from a third party; usually a broker with the intention of buying identical assets back at a later date to return to the lender.) you must have a margin account. When you have a margin account you also have a cash account.

With an option account you are allowed to call and put in requests to trade stocks. In order to open this type of account the broker has you sign a statement to the fact that you acknowledge and understand the risks associated with trading instruments. This is protection for the broker against being sued when clients may have large losses due to their tradings and say they didn't understand the risks involved. Other than this an option account is pretty much the same as a margin account. 

Margin accounts are more restrictive than cash accounts. If you want a margin account the broker will run a credit check on you. You will be asked to sign a separate margin agreement. The agreement states that the broker can use any of your securities in your margin account as collateral if your account is in debit balance meaning you owe the broker money. Securities in cash accounts do not count in margin requirements. 

Another agreement that is unique to a margin account is the "hypothecation and re-hypothecation" clause. This clause allows the broker to lend out your securities at will. So the ability to borrow money always comes with a tradeoff  that the broker can lend the money that your account holds to short sellers. Also understand that when you borrow from a brokerage you pay them but they do not pay you or do not even notify you when they borrow your shares. 

Lately a lot of brokerages offer Visa Check cards which work like credit cards. The difference is the money spent on the card is taken out of the brokerage account. Instead of using your bank account it serves like a checking account;  but with your money market accounts as with stocks and bonds investment accounts. 

Like anything else where you place your money, do your research first before going with any one brokerage. Look at what they offer versus your needs or if you want an online brokerage. There are listings available for brokerages on line that you can Google. Make sure the company is reputable and has the proper licensing requirements met by your state.

You might also like

Previous
Next Post »