What Is a Stock Brokerage Firm?
Investors buy stocks in order to reach long-term financial goals. Stock brokerage firms are an important part of this process, as they provide access into financial markets for individuals. Brokerages effectively narrow the gap separating professional Wall Street traders from smaller Main Street investors. Brokerages levy fees according to services rendered, and you should learn to differentiate between the primary classes of these financial firms before making investment decisions.
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Identification
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The Securities and Exchange Commission describes brokerages as fiduciaries that execute financial transactions on your behalf. This fiduciary responsibility calls for stock brokerage firms to act within your best interests in regards to making investment recommendations. Brokerages manage and administer trading accounts, but do not actually own any of the securities within your account.
Brokerages use information technology to match buyers and sellers together within financial markets. Stock markets function as large auctions, where traders make bids and negotiate prices for investments. Brokerages handle the buying and selling stock transactions for their clients.
Features
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Stock brokerage firms are categorized as being either full service or discount brokerages. Full service brokers are financial advisers that put together comprehensive plans for your investment portfolio, insurance coverage, and cash management strategy. They may charge by the hour, or take a percentage of the assets under management as compensation.
Alternatively, discount brokers simply execute transactions to trade securities, without offering any advice. Discount brokers, such as Scottrade, Ameritrade and eTrade, are associated with a prominent online presence and low trading commissions of less than ten dollars per order. Discount brokers are ideal for economical consumers that prefer to conduct their own investment research and make trades using their personal computers on the Internet.
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Benefits
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Brokerages lower costs by introducing liquidity to financial markets. Liquidity describes the process of converting assets into cash. Without brokerages, investors would be forced to spend time and money either actively soliciting trading partners or buying $1 million memberships at financial exchanges. Instead of incurring these expenses, investors may open brokerage accounts to buy and sell shares of stock for the relatively minimal costs of trading commissions. Stocks can be sold for cash through brokerage networks within seconds.
Considerations
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Stock brokerage firms often operate as dealers who trade securities for the company's own account. Investment companies must disclose any potential conflict of interest from these situations to their clientele. For example, your brokerage firm may recommend that you buy shares of stock from the in-house inventory that the firm actually owns. In this case, your broker must indicate that it is negotiating the transaction as a dealer.
Warning
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The Securities and Exchange Commission highlights phishing scams as a threat to online trading. Phishing is associated with identity theft, where criminals steal your account information to make unauthorized trades and balance transfers. When using a personal computer to trade stocks, log onto your broker's website by physically typing in their website address in your browser's navigation bar, and never log in by responding to a link from an email, as this may be a phishing scam and lead you to a site that appears to be the legitimate site, but isn't.
Full service accounts are susceptible to "churning" activity. Churning happens when brokers recommend multiple trades for the sake of earning commissions, instead of creating wealth for their clients.
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