What Investors Need to Know Before Choosing a Stockbroker

What Investors Need to Know Before Choosing a Stockbroker

To buy and sell stocks, you need to hire a stockbroker. This individual acts as a middleman between investors and the stock market. Brokers act sort of like salesmen to facilitate a sale on behalf of a larger brokerage house, such as Charles Schwab or Merrill Lynch. Once brokers carry out a transaction, they typically receive a commission on the sale. However, some brokers may actually earn a salary, or a mix of both commission and salary.

Choosing a broker can be an extremely important decision for investors, so it is important to know what to look for and what questions to ask. This process starts by understanding exactly what a broker does. Stockbrokers must pass two licensing exams before they can assume that title. These exams are called the Series 7 and Series 63. Once an individual passes these tests, they have the legal ability to execute transactions and provide advice. Importantly, stockbrokers are not research analysts. Many brokers will undertake their own research, but not to the same degree of depth as analysts.

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What Are the Different Classifications of Brokers?

Beyond the licensure outlined above, brokers fall into several different broad categories. Regular brokers work directly with their clients, but broker-resellers work on behalf of a larger broker. Because regular brokers are members of the Financial Industry Regulatory Authority (FINRA), the Securities Investor Protection Corporation, or similar organizations, they tend to be considered more reputable. However, broker-resellers can also be a good option provided that individuals check them out thoroughly before signing any papers.

Another important distinction between full-service brokers and discount brokers exists. Full-service brokers offer services in addition to executing investment transactions. In general, these individuals offer customized advice and will go deeper into research to offer personalized suggestions. However, this extra level of service often comes with a steep price. The phrase “discount broker” does not mean that these individuals do not also offer great customer service—most of them are happy to provide advice about a particular trade for a particular situation. Of course, this particular trade will cost more than normal, but it is important for beginning traders to realize they still have this option with discount brokers.

Because full-service brokers can eat into any investing profits rather quickly, younger investors and people who are just getting started tend to opt for discount brokers, unless they have a lot of money to invest. Another point to consider is the fact that many discount brokers operate online and provide a wide range of tools to help inexperienced investors. These tools do not have the same price tag as a full-service broker. In addition, the tools help novices learn more about the process so that they are better prepared to make decisions in the future.

 

What Fees Are Involved with a Broker?

The main fee that you will pay to a broker is the trade execution fee. However, a number of other fees may exist that you should investigate before signing any paperwork. For example, some brokerages will charge a fee to withdraw from the account and/or they might limit withdrawals that will cause the account to drop below the minimum. While a number of accounts may operate like a checking account, they tend to have much higher minimum balances. You should always ask about the rules regarding withdrawals from the account and what the different minimum balance requirements are. Another important point to ask about is margin accounts, which you may be interested in if you find you enjoy trading and are good at it. However, making a trade on margin may involve a hefty interest fee.

If you examine fee schedules, you will likely notice that many of them look the same. However, some brokers can have particularly confusing fee schedules, especially broker-resellers. In these cases, it is critical to understand the fee structure, identify hidden fees, and ask whether the structure aligns well with your investing goals. Rates that seem too good to be true often are. Brokers sometimes use the account agreement and fee summaries sections to hide random charges.

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What Does an Investor Need to Consider When Choosing a Broker?

Choosing a broker is almost like choosing a stock. Not all brokers are a good fit for all investors. Think about your goals and your style before you start identifying potential brokers. If you’re interested in short-term trades based on market volatility, you will need to execute a number of deals over a short period of time. In this case, you should look primarily for brokers with low execution fees, as high rates will begin to add up quickly. Usually, this approach is best for experienced traders.

Novices tend to be more passive and let the value of stocks increase over a long period of time before reaping the benefits. If this description fits you, look for brokers that do not charge monthly fees. Since your trade volume will be fairly low, higher initial fees should not be a problem.

Of course, most investors fall between these two extremes, so thinking about your expectations can help you identify what is most important to you in a broker’s fee structure. It’s also worthwhile to spend some time investigating customer service. Regardless of who handles your money, investing can be a stressful experience—but it can be much easier with great customer service, including timely responses.