Introduction to Stockbrokers: What they are and how they work

Picking the right stockbroker is as important as picking the right stocks. Ensure you conduct the proper research.

After learning all about stockshow to read them, and how to create an investment strategy, you are probably itching to get started and buy your first stock. Unfortunately, this is not possible without the help of a stock broker. Not all stock brokers offer the same services and one “size” does not fit all, so let's get right to it.

So, what exactly is a stockbroker?

A stockbroker is a broker who facilitates the process of buying and selling securities on a stock exchange on behalf of clients. The rise of the internet, however, has drastically changed the role of stock brokers. Online brokerages now allow investors to purchase their stocks from their computers, at much lower costs.

It the past, only the wealthy could afford hiring a broker and get access to the many great companies available on the stock market. However, advances in technology and the rise of discount brokerages has forced full service stock brokers to adapt their roles and become more of an advisor to their clients. Modern day stock brokers are also referred to as Registered Representatives or Investment Advisors, and work with their clients to build them a portfolio, charging a fee every step of the way. Discount brokers offer a great do-it-yourself alternative and at a much cheaper rate, creating affordability and accessibility to the stock market for the masses.

8 Questions to Ask When Choosing an Online Broker

Picking the right stock broker is a crucial step when beginning your investing career. There are many different brokers out there that offer varieties of the same basic service. With so many options to choose from it is imperative to understand the questions you need to ask in order to pick the right one for you.

  1. Do I need an advisor, or can I pick stocks myself?

    There are two main types of brokers: traditional full service stock brokers or discount brokers. This is the question that will help you decide which direction to go. If you are able to pick stocks yourself, you have a huge advantage. If you would like to learn how to invest in the stock market on your own, or grow your existing knowledge, you came to the right place. Wall Street Survivor's courses will demystify the stock market and have you feeling comfortable investing in equities in no time. With the ability to purchase stocks yourself, you only pay commission fees to the discount broker and therefore you can save a ton of money on management and advisory fees. Alternatively, if you don't have the time to learn how to invest in stocks, or do the research needed to build a proper portfolio, then using an investment advisor may be the way to go. Although you will be paying higher fees and there are generally minimum investments, most advisors work with you to create an investment strategy and portfolio made up of stocks that are right for you.

  2. Is my broker available when needed?

    Whether you are using a discount broker or a full service broker, there will be a time when you need to get in contact with your advisor or the customer service team of the online broker. Your advisor may not be quick to return your calls or you may be on hold for long periods of time with your online broker. Before you jump into bed with any brokers, try using the website during peak trading hours and seeing how the site loads and check some of the links to ensure there are no technical difficulties. These are red flags that signal you should keep looking.

  3. What is the minimum deposit?

    If you will be working with an Investment Advisor, then there certainly will be a minimum investment requirement. Most investment firms offering advisory services cater mostly to high net worth individuals. Discount brokerages may try to entice you with low trading fees but in-turn require minimum deposits as well. If you are part of a large bank, you can often go to your branch and ask to open a direct investing account, a seamless and easy way to begin investing.

  4. What is my budget to invest?

    If you have a huge amount to invest, you may want to go with a combination of an advisor and a discount broker (assuming half your budget meets the minimal requirement for working with an advisor). By doing so, you effectively diversify your risk through professional advise and self-investments. If your budget is smaller, you need to look at the two main differentiators between discount brokers: a fee per stock purchased, or a fee per transaction. If you are buying small quantities of shares at a time, you are better off going with a discount broker that charges a flat fee per share. Otherwise, you are better off going with a flat fee per trade commission.

  5. What are others saying?

    The background of the broker matters. There are a variety of websites that offer reviews of different stock brokers. There will be no perfect broker that checks off all the criteria on your list, so prioritize necessary attributes accordingly. Read the reviews and take note of the pro's and con's and narrow your options down to the one that aligns most with what you're looking for.

  6. What are the availability of products?

    Some advisors may only have the ability to purchase stocks, bonds and mutual funds. Same goes with discount brokerages. It is important to think about more than just buying stocks. As you become a more advanced investor, you may want to begin using more advanced techniques such as trading options and short selling. Make sure that these alternatives are available to you when opening your account.

  7. Do they offer a research section?

    This question applies more to online discount brokerages. Generally, if you elect to go with a big bank, they will offer tools that help with researching stocks, including quotes, charts and in-depth research reports. Smaller brokerages may not offer such services. If the research platform is advanced and offers information that is not readily available online, bonus marks for them.

  8. Any extra offerings?

    Check out if the broker is offering any special promotions. This could come in the form of limited time free trades, cash back for joining and higher interest rates on saving accounts. Although this shouldn't be a deciding factor, should a discount brokerage offer a high interest rate on the funds sitting in cash, it can enticingly influence your decision, especially if you tend to hold large amounts of cash at a time.

Choosing your broker is an important decision. It could be the start of a long-term relationship of which there is constant interaction. It is imperative that, like buying stocks, you do as much research as possible in order to be content with your broker. Nerd Wallet offers a great review tool, highlighting commissions, account minimums and promotional offerings, to find the best discount broker suitable for you. It is tedious work to do, but once it is done you will be working with this broker for the foreseeable future, so make sure it is done right!


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