When you want to buy (or sell) shares of a publicly traded stock, typically you will use the services of a broker.
A broker (stockbroker) must pass an examination on securities law to be licensed to trade securities. Licensed individuals are registered representatives of brokers.
Brokerage houses are large firms that deal in securities and may belong to an exchange such as the New York Stock Exchange or the American Stock Exchange.
Brokers do more than execute trades
Besides buying and selling securities for customers, brokers may provide other services such as doing market research. Most people do not have the time or resources to adequately research companies they consider for investment.
The broker can be of assistance. With vast resources, brokers can provide investors with the "market intelligence" to allow them to make wise investment decisions. Other people prefer to "do it themselves."
Full-service brokers research investments and assist their clients with their investment decisions. For this service, a commission compensates a full-service broker for the transaction. Here are some other services a full-service broker may provide:
Suggesting good investments
Limited tax advice
Access to initial public offerings
Full-service commissions are higher than commissions to brokers who do not provide research services.
Discount and deep-discount brokers
Discount brokers simply execute your trades. They typically do not provide many other services. Discount brokers are compensated with commissions on transactions. Their commissions typically are lower than those of full-service brokers.
Deep-discount brokers execute trades only. Because their customers trade in large quantities regularly, they are able to charge the lowest commissions.
Online brokerages and what they offer
The introduction of online brokerage services—brokerages that assist investors in trading over the Internet—has changed the rules considerably in the brokerage industry. Technically speaking, online brokerage services can be classified into the categories of full-service, discount, and deep-discount.
However, the cost effectiveness of this new medium has allowed many brokerage houses to expand their services while reducing their prices. Many online brokers are beginning to offer services comparable to those of full-service brokers (such as online research materials and online educational materials) at prices similar to or below those of the prices of traditional discount brokers.
When you are choosing the broker and brokerage house that are right for you, it is important to consider all the options. You should select the type of brokerage firm based upon the kind of trading you plan to do and services you require.
This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.