Brokerage Firms Information
Brokerage firms have been executing trades on behalf of investors for decades. Over the years, most brokerage houses have converted from traditional brick-and-mortar offices to Internet companies. The role of the stock broker, however, has largely remained the same and that is as a middleman between investors and stock exchanges.
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Types
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Choosing a brokerage firm depends on the needs of an investor. The two primary types of brokerage firms are full-service brokers and discount brokers. According to MotleyFool.com, at least 60 discount brokerages are out there to choose from, along with full-service brokers.
Of the two types of brokerages, a full-service brokerage is the more comprehensive offering. It consists of brokers who are there not only to execute "buy" and "sell" orders on behalf of customers, but also to help those investors make informed investment decisions. Typically, a full-service brokerage can trade a host of financial products, including stocks, bonds, derivatives, annuities and insurance in addition to providing investment advice and research to investors.
Discount brokers' primary objective is to execute "buy" and "sell" orders for investors. Typically, formal investment advice and complex products do not accompany the services that discount brokers provide.
Investors can initiate "buy" or "sell" orders online at either full-service or discount brokerage firms.
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Time Frame
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Investing in the stock market can prove to be a volatile experience given the different market cycles that stocks go through. For instance, during a bear market cycle, growth is slow or worse, with broader markets declining for an extended period of time. Conversely, in a bull market cycle, returns are robust.
One way to prepare for market volatility is to determine an investment time horizon prior to earmarking capital for stocks. If capital will be needed prior to the end of a five-year period, investors may want to hold off on selecting a stock broker as those funds might be better placed in short-term investment vehicles, such as a savings or money market account, or a certificate of deposit, according to the Motley Fool.
Once an investor decides she can afford to have capital tied up in the stock market, the brokerage selection process can begin.
Features
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Selecting a brokerage may come down to the various features that set these firms apart from one another.
The brokerage community largely began to introduce services on the Internet in the mid-1990s, but major brokerages such as Charles Schwab, Fidelity, TD Ameritrade and Scottrade still have brick-and-mortar retail offices available. Investors who rely even in part on discussing their portfolio face-to-face with a broker should select a firm with retail offices.
Another consideration when selecting a brokerage firm is account minimums. ShareBuilder.com, for example, requires no account minimum to place trades. To invest with Scottrade, investors must maintain a brokerage cash balance of at least $500, while ETrade and TD Ameritrade require higher cash balances of $1,000 and $2,000, respectively.
Considerations
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Consider the fees involved with each type of brokerage account. For instance, because full-service brokerages offer an array of services and complex products, fees associated with these firms tend to be higher than those of discount brokerages. Full-service brokers are compensated mostly on commission based not on the performance of an investor's portfolio, but instead on how often a customer trades.
In addition to charging lower fees, discount brokers differ from full-service brokerages in that full-service brokers tend to earn flat salaries instead of being compensated with commissions. Discount brokers compete with one another based on prices they offer to investors and the speed and manner in which they execute trades.
Warning
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Relying on a brokerage firm to oversee capital comes with its own set of risks. A broker, while certified in the Series 7 and Series 63 financial exams, may still give bad advice, which could prove costly to investors. In addition to being advised by a stock broker, investors can do their own due diligence by reading a company's prospectus, which should be made available on the investor relations page of a company's website.
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