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How to Choose a Stock Broker
By Robert Banks
Depending on the type of investing that you plan to do, you may need to hire a broker to handle your investments for you. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. The answer is yes. If you intend to buy or sell stocks on the stock exchange, you must have a broker. Choosing the right broker is critical. It can mean making money for yourself with your trades, or end up you making money for the broker.
Stock brokers are required to pass two different tests in order to obtain their license. most common test is the Series 7 (General Securities Representatives Examination), which is the test over 95% of stock brokers have taken and passed. The second license is a more restrictive license that limits the person possessing it to sell, and buy certain investment vehicles for customers.
It is very important to understand the difference between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock and not to analyze stocks. Brokers earn their money from commissions on sales in most cases. When you instruct your broker to buy or sell a stock, they earn a set percentage of the transaction. Many brokers charge a flat ‘per transaction’ fee.
There are two types of brokers – full service brokers (Merrill Lynch, Morgan Stanley Dean Witter, and Citigroup's Salomon Smith Barney) and discount brokers (Charles Schwab and Fidelity). Full service brokers can usually offer more types of investments, may provide you with investment advice, and is usually paid in commissions. Discount brokers typically do not offer any advice and do no research; they just execute the trades as you ask them to do, without all of the bells and whistles.
So, the biggest decision you must make when it comes to choosing stock brokers is whether you want a full service broker or a discount broker. If you are new to investing, it is wise to go with a full service broker to ensure that you are making sound investments. This way, you have access to knowledge, experience and investment opportunities you would not usually have access to. However, if you are already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you. It is much cheaper to invest stocks yourself.
Before you choose your stock broker, you need to evaluate your personal finances – how much you want to invest, how much return you expect, how much risk you are willingly to take and how soon you what to achieve your investment goals. Some brokerage firms allow for transactions as low as $10. Other firms will not allow you to open an account with them unless you have a minimum first investment, usually in the thousands of dollars. Hence your budget will determine the type of service and assistance you get.
Next, shop around for references. Ask relatives, friends, co-
Once you have narrowed down your list of potential stock brokers, ask about fees and commissions, and compare prices. Find out how commissions are determined and how much they will be. A few discount stock brokers have hidden fees. Always read the fine print carefully. There are plenty of places they can tack on miscellaneous fees to drive up the overall cost. This particularly important if you're a penny stock trader.
In addition to that, you should also be comfortable with your stock broker's investment
philosophy. If you feel uncomfortable about any investment proposition, tell your
stock broker and if he goes against you, then you definitely have the wrong stockbroker.
A stock broker that guarantees zero loss and high returns, is too good to be true.
Also, be sure to review the broker's employment history, experience, training, certification
and licensing, and check if they have ever been disciplined or violated NASD regulations.
can get a report on the legitimacy and performance of any stock broker at the National
Association of Securities Dealers (1-
Once you have decided on your stock broker, do not expect to be up and trading at once. It takes couple of days to open an account and not to mention, application and set up fees.
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