Stock Broker Basics

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If you are investing for the first time, the stock market can be a little intimidating.
Finding the right stock broker can be even more of a challenge.
A stock broker is a professional broker who buys and sells shares and securities on behalf of the investor.
Any transaction on the stock exchange must be completed between two members of the exchange.
This is why all trading must be done through a registered broker.
The advice or service given by the broker is accompanied by a commission or fee.
The amount of commissions and fees that you pay for varies largely by the amount of your trading activity and the types of investing services that are provided.
There are three general types of services that stock brokers can provide: Execution only broker- this basically means that the broker is merely carrying out the customers instructions to buy or sell.
Many discount brokers fall into this category.
The commissions and fees are much lower than full service brokers due to the fact that you are not receiving investment advice from them.
Advisory broker- brokers advise customers on specific shares to buy and sell.
Ultimately the decision is up to the investor as to where to put their money.
Discretionary broker- based off of the investor's financial objectives the broker will make all transactions and investment decisions on the client's behalf.
Before you determine what type of service that you will need ask yourself the following questions: 1.
What is my trading style? Investors tend to put their money into the market for a longer period of time.
They are in essence invested in their positions.
Investors might find that a brokerage which has better research tools will assist them in finding the right companies for longer term positions, even though the commissions may be significantly higher.
In addition, investors are often concerned about maintenance fees and inactivity fees because they might not trade for a long period of time.
Traders tend to move their money around more frequently.
Traders are much more active in buying and selling stocks.
A discount brokerage may be a better option to help keep commission fees at a minimum.
If fees are eating up all of your profits, it might be time to look around for a discount broker that suits your trading style.
- Swing Traders- These types of traders often hold positions for several days at the most.
Swing traders try to make money off of the swings (upside and downside) of the market, which requires them to trade often.
Commission fees are a big factor because they can really add up over time.
- Day Traders- Day traders get their name due to the fact that they normally only leave positions open for a couple of minutes to a couple of hours.
It is very rare that day traders keep a position open past the trading day.
Trading tools that relay real-time data for market news, volume and price are essential to these types of traders.
The time required to execute a trade is also a key factor because slippage in price equals loss in profit for a day trader.
Note: You must have over $25k minimum in your account order to execute unlimited day trades.
Any account below that amount is only allowed 3 day trades (buy a stock and sell it in the same trading day) per trading week.
Small cap Traders/Investors have smaller account balances and must take commissions and fees into account because they can have a big impact in overall profit.
Discount brokers are often the best choice for people with a small account, even though most discount brokers do not offer as many trading tools as their more expensive counterparts.
2.
How much do I know about investing? If you are new to investing, paying for a full-service broker may be a good option to help give you advice on general investing procedures.
Keep in mind that just because you are using the advice of a broker does not necessarily mean that you are guaranteed a return.
In addition, the fees and commission of a full-service broker must also be taken into consideration.
For investors that are more seasoned and understand the basics of trading, a discount broker may be the best option.
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