Stock Brokers
Brokers handle most of the buying and selling on
the stock market, and the average investor will use a brokerage service
to handle his trades. There is a broad range of brokerage services available.
There are brokers who offer many services for aiding their clients meet
their investment goals. These 'full-service brokers' can give advice
about which stocks to buy and sell and often have full research facilities
for analyzing market trends and predicting movements.
These perks are not free – full service brokers
charge the highest commission rates in the industry. Whether or not
you decide to use a full-service broker depends on your level of self-confidence,
your knowledge of the stock market and the number of trades you regularly
make.
Investors who wish to save on commission fees can
use a 'discount broker'. These brokers charge much lower commissions
but don't offer advice or analysis. Investors who like to make their
own trading decisions and those who make many trades often use discount
brokers for their transactions. Some traders may use both types –
there is no reason why you can't have two brokers.
The least expensive way to trade stocks is usually
with an online brokerage. Both full-service and discount brokers usually
offer discounts for orders placed online. Some brokers operate exclusively
online and offer even better rates.
No matter what type of broker you choose, you must
first open an account. Each broker sets their own requirements for maintaining
an account balance but it is usually between $500 and $1000. When choosing
a broker look at the fine print and find out about the fees involved.
Some brokers charge an annual maintenance fee while other charge fees
whenever your account balance falls below the minimum.
There are two basic types of brokerage accounts.
A 'cash account' offers no credit – when you buy you pay the full
amount of the stock price. A 'margin' account, on the other hand, allows
you to buy stock 'on margin' – the brokerage will carry some of
the cost of the stock. The amount of margin varies from broker to broker
but the margin must be protected by the value of the client's portfolio.
If the portfolio falls below a specified amount the investor will have
to add more funds or sell some stock. Margin accounts allow investors
to buy more stock with less cash thereby realizing greater gains (and
losses). Because they involve more risk than cash accounts, margin accounts
are not recommended for inexperienced traders.
Before choosing a particular broker the investor
should carefully consider his needs. Does he wish to receive advice
about which stocks to buy? Is he uncomfortable making trades on the
Internet? If so, he should go with a full-service broker. Technology
savvy investors who have the knowledge and confidence to make their
own trading decisions are better off with a discount broker.
After deciding which type, compare a few
competitors. There can often be significant differences in costs when
all the annual fees and brokerage rates are factored in. Try to gauge
how many trades you expect to make in a year, how much cash you can
deposit into your account, whether you wish to use margin accounts and
which services you need. This information will allow you to compare
the actual costs of various brokers.
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