What is a broker?
A brokerage is your gateway to the stock market when you have determined that you wish to trade stocks. Brokerage firms are companies aiding you in trade execution. The firms may be mega-sized MNCs, modest-sized specialized small businesses, and diversity in between. A broker is instrumental in giving you a memorable trading/investing experience.
What exactly does a broker do? Or Do brokers make money? Or Who is called a broker?
Regardless of if you opt for an all-purpose broker, or one specializing in commodities, futures, or stocks, you are in the driving seat when the selection gets underway.
Brokerage account
You have to understand how a brokerage account can help you in your trading career. These are investment accounts, permitting you to trade in securities. They are subject to fees and taxes.
Choosing your broker
There are two types of brokers – full-service and discount. The broker you go for is contingent upon if you would like a high level of service at a higher price or full control at a lower price. If neither sounds right, there are firms offering a hybrid service level.
It’s important to fix your starting capital. How much can you invest? Be sure to invest only money you will not be needing in the coming five years. Some firms’ account minimums are way out of reach for ordinary investors. There are some brokers, too, that offer the opportunity to start trading with them at ridiculously low proceed account minimums.
Types of brokers
There are basically two types of brokers: full service and discount brokers.
Full-service brokers work for large brokerages, the likes of which may include Merrill Lynch, Morgan Stanley, and Edward Jones. All brokers execute trades for you. But only full-service brokers will take the responsibility to do comprehensive research and give you advice.
The leading light high-quality brokerages no doubt give excellent advice. Investment advice from such quarters, however, tends to be very pricey.
If you get in touch with a full-service brokerage that’s not very famous, pelt them with the following queries:
- Does the broker have the experience to justify its fees?;
- Will it aid you in retirement planning?;
- Will it help with tax strategies?;
- Can you trust their recommendations?
Whatever the history or reputation of your broker, remember you are paying them for high-quality expertise. And it has to show in their treatment of you.
Full-service brokers: costs
Expect to pay hefty fees for the services of a full-service broker. The ideal client would be an investor with a large portfolio but without the time or the motivation to do investment management on their own.
Be especially cautious as to what’s in your written agreement.
For these services, a full-service broker may charge as much as $250 for a trade. A discount broker like InvestBy would cost between $0 and $25.
Full-service brokers charge annual service charges or maintenance fees on your account.
Caveat: Full-service brokers
A good number of full-service brokers get commissions for each trade, their compensation may largely be the number of times they buy/sell stocks in your account. A less ethical broker may be buying/selling stocks merely to earn fees.
Discount brokers
There are many well-known online discount brokers. To name a few – Interactive Brokers, Pepperstone, IG Group, Charles Schwab. There are many that have established themselves in the top-rung of service providers within less than a decade. PrimeFin, ABinvesting, and InvestBy come to mind.
Where discount brokers are differentiated from full-service ones is the possibility of guidance. The consultations offered by a full-service broker are priced, session by session. You need deep pockets to keep up with such costs.
Discount brokers have democratised trading by giving ordinary investors access to cutting-edge trade tech. However, in the libraries of a discount broker, you will have neither mentor nor guide. You will have to make sense of the resources yourself.
Whether it be educational material or research tools, you have to be sufficiently motivated to make your trades on your own.
Naturally, expert advice may be sought periodically from Customer Support. Nonetheless, such advice will count only so far as your own trading competence. You will have to be quick on the uptake. With challenging situations, you will get plenty of opportunities to make trade situations grist for your mill.
The fees you pay your broker (brokerage fees)
Investment advisor fees differ from firm to firm, even from account to account. In a tiered system, you are charged a percentage that diminishes the more you have invested with the broker.
Custodial fees are the price the bank charges for the guarding of your securities. The broker, as custodian, collects your dividends and issues your account statements. In case you have paper stock certificates and keep them with a brokerage, they will charge a fee for maintaining them for you.
How useful is an asset management account?
Brokers are facilitating the extinction of the conventional brokerage account. Rather, they offer an asset management account. Hybrid accounts, combine brokerage, banking, and insurance services for a streamlined experience.
Thru activity consolidation, you may be enabled to take advantage of services provided only to higher account balance clients. You will be able to spot all your financial activity in one place in your monthly statement. You could even earn high interest thru the use of the attached money market account, rather than use a regular checking account.
There’s a catch, however: you will have to be able to afford a minimum account balance of $5000.
Conclusion
Smart investing is all about being ready. Your broker will provide you with cost-effective trading opportunities. Fast execution speeds for trade execution would be the norm. Be mindful, naturally, of the regulatory status of your broker. You don’t want to be left high and dry with a fly-by-night operator.
Even regulated brokers can, albeit quite rarely, may lose funds thru hacking or some security lapse. Make sure your broker will be able to compensate you in such a rare event. Trading with InvestBy, you will never be saying ‘goodbye.’