If you’ve never invested in stocks before and are about to buy some for the first time, you should understand what to look for and what factors to consider when selecting a stockbroker. It can be a good idea to use a stockbroker for an active management of your stocks or mutual fund portfolio. Most investors will use a stockbroker at one time or another.
First of all, what is a stockbroker? Well, I’m not really sure… 😉 …just kidding. A stockbroker is an intermediary between you and the stock market, which is an exchange where shares of stock in public companies are openly traded. When you buy or sell a stock, also known as a “security,” you must place the order through a broker, who then transacts your business by placing the order on the market.
I personally use a discount broker only to carry out my order, I am willing to listen to a full-service broker’s story but in the end invariably the decision is mine. If you have done your homework, trust me a broker doesn’t know much more than you.
A discount broker is someone who gives you zero advice, and just executes your market orders for you, but does nothing else. Therefore, a discount broker usually doesn’t collect commissions. Instead, they usually charge a flat annual fee and are paid a salary. Internet brokers such as Etrade or Ameritrade are discount brokers that work on commission. They allow you to place your market orders online, and the website itself is the broker. Internet brokers usually charge a much smaller commission than anyone else.
If you use the services of your bank there are some facts to consider. When you talk about the options you have to invest your money, they will certainly recommend the funds they control themselves. Do they recommend other banks portfolios? I don’t think so. If you go to a car dealer that sell Ford, do they recommend you to buy a Lexus?
So, be careful when selecting your broker. If you hire a full-service broker, make sure it’s someone who works for or is associated with a reputable brokerage house, and make sure that the broker understands that you are aware of the fact that they make money every time a trade is executed. In this manner, they’re less likely to eat away at your capital unnecessarily, because they’ll know upfront that you’re hip to their game. If you know what stock you want to buy and are a small investor, it’s best to go with a discount broker, because they don’t receive commissions. and therefore won’t persuade you to place superfluous trades.
There are the authorities though to help the customer out. And there are rules and regulations about the way stockbrokers can and shall work. Depending on in which country you are investing the rules can vary. In some countries stockbrokers can have his own portfolio and the company where he works can also have a portfolio of shares. Imagine a fund manager being allowed to invest in the fund he manages, he is likely to overlook the interests of his client.
This makes an eventual conflict arise whenever something special happens. There are numerous customers that suspect that they have been recommended shares in companies that will face problems and where the stockbroker wants to sell his own shares before the market drops.
Stockbrokers in general are behaving in a professional way and realize that their business will benefit most if the outcome for their customers are great. As a customer you are advised to check the results that a stockbroker have produced, trace their records. Do not look at the advertisements, the truth about the results are not there.
Picking a broker shouldn’t be about price alone. Be honest with yourself about how much help you can use and go with the broker who can fill in any gaps in your knowledge and experience. Together, you could make a better investing team.