Choosing The Right Stockbroker
Full Service & Discount Stockbrokers
There are two main types of stockbrokers: full service stockbrokers and discount stockbrokers.
In this article we will look at both of these stockbrokers, and see what they do and what you might need them for.
Full Service Stockbrokers
Full service stockbrokers provide a variety of services to investors who open an account with them.
If you go to a brokerage firm and open up an account you will be assigned a representative who will deal with your account. Usually this person is called an account executive, a registered rep or a financial consultant.
This person will help you with your investments and offer advice on where to invest your money and which stocks may be worth buying.
What Do Full Service Stock Brokers Do?
A full service stockbroker is there to help you make investment decisions. Some of the things they can do for you include:
Help & Advice
Your account representative will offer you help and advice when making investments decisions.
Normally you will talk with your representative on a first name basis, and tell them about your current financial situation and your financial goals.
Based on what you tell your representative, they will then advise you on the best stocks and funds that are most suitable for you.
Research
When investing in the stock market you need to do a lot of research to ensure you make the best investment decisions. A full service stock broker can help you do this.
They will be able to provide you with information about a company you might be interested investing in, and information on other companies which they feel would be a good option for you.
Of course this information may turn out to be inaccurate, so don’t invest in a company just because your representative says so without looking at it closely yourself.
Investment Goals
Ideally your account representative should have a good idea of your investment goals, and then will work to help you achieve those goals.
In particular, they may discuss investment strategies that you can use and give you a clear picture of how long it will take you to reach those goals.
Making Investment Decisions
If you build up a good relationship with a full service stockbroker, you may feel as though you can trust them enough to make investment decisions on your behalf.
This saves you time from having to make investment decisions yourself, and can be an excellent way to invest if your broker has a good track record.
Things To Look Out For With Full Service Brokers
Having a good broker can make things a lot easier when investing in the stock market, however, there are some things you should be aware about as discussed below.
Brokers Are Salespeople
Brokers are salespeople which means they get paid to treat you nicely. Brokers generate commission and fees from you to the company they work for, so don’t forget that, no matter how nice they seem.
Make Your Own Investment Decisions
A broker should be seen as a source of advice, rather than a final decision. Always make your own choices as to where you invest your money, and make sure you fully understand why a broker is giving you a particular recommendation.
Cost
If you choose to go with a full service stockbroker rather than a discount stockbroker it’s going to cost you more.
A discount broker gets paid just to buy or sell stocks for you, while a full service broker also gets paid to give you advice on which stocks to buy or sell.
Control
If you allow your broker to control your investment decisions you are essentially handing them over control of your money.
If they make investments that turn out bad, then you will lose money and they will still get paid.
So unless you feel as though you can absolutely trust your broker, don’t authorise them to make investment decisions on your behalf.
Churning
Because brokers get paid to buy and sell stocks, some brokers try to buy and sell as many stocks as they can just to make extra money for themselves.
This is called churning and is done in their best interest and not yours. If you notice lots of activity going on in your account, make sure you investigate it and ask for an explanation.
Discount Stock Brokers
If you are experienced in dealing with the stock market then you may not need a full service stockbroker, but rather a discount broker.
Such brokers will help you buy or sell stocks, but won’t offer you advice on your investment decisions.
Discount brokers are cheaper than full service brokers, but you need to make sure you have done adequate research beforehand since it will be up to you to make good stock selections.
There are two types of discount brokers you can choose from. Conventional brokers who do business via an office and phone, and internet brokers, who do business via a website.
However, since most brokers now have a website, conventional and internet brokers are basically the same thing.
What Can Discount Brokers Do For You?
Some of the advantages of using a discount broker as opposed to a full service broker include:
Lower Cost
Discount brokers are cheaper than regular brokers, so if you are just starting out investing and have limited funds then they may be the best option for you.
Unbiased Service
Since discount brokers only buy and sell stocks for you, and don’t give advice, they do not have a vested interest in trying to sell you a particular stock.
Information
Large and well established brokers can offer lots of information to help you do research from their office or website.
Things To Be Aware Of When Using Discount Brokers
There are some downsides to using discount brokers you should be aware of.
No Guidance
Since discount brokers only buy and sell stocks they don’t offer you any advice on your investment decisions.
This means you need to do your own research beforehand so that you know what you should buy or sell.
For people who are new to the stock market, this may pose a problem. So unless you are an experienced investor, you are probably best going with a full service broker.
Fees
Although it is true that most discount brokers have lower commission rates, they can still make money through fees. For example, you may be charged extra for services such as issuing a stock certificate or mailing a statement.
