How to pick a Stock Broker?

stock_rally1.PNGIf 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?

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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.

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6 Responses

  1. Shane says:

    You’re right Robin, in the end you have to do your own homework.

    A few years ago, an associate of mine got involved with a stockbroker who was the brother of this woman he was seeing.

    They didn’t exactly live happily ever after.

  2. Robin Bal says:

    Hi Shane,

    If you are looking to deal through a full service broker, then you have to make sure of a few things as mentioned in the post.

    As an investor you have to understand that there could be losses and gains associated. The stock markets don’t always go up but if you stay invested long enough, the market will probably outperform any other investment.

    And the stockbroker is not the guy who carries a magic wand. 😉

    Take care and Cheers mate

  3. roland says:

    very informative! how much does it usually cost to hire a stock brocker?

  4. Robin Bal says:

    Hi Roland,

    Thanks for your visit, if you want to hire a full-service broker, depends on what part of the world you are in, and since you ask that question I assume you have never invested in shares. Study the markets, do you homework and start in a small way with a discount broker, its what I do. I repeat if you have an understanding of stock markets, then a stock broker doesn’t know much more than you. If you can send some more details I will be able to help you in this. You can also ask around for details.

    Take care and cheers.

  5. AC Rentz says:

    I am looking only to sell what shares I have. I am not a trader of any kind but aquired some shares that I would like to simply sell. I need a discount broker, but what is the procedrue to start and where?

  6. FI says:

    These days, it seems like financial and investment frauds are everywhere. In the wake of the financial crisis, a company that is a client of mine put out a new book detailing five signs of financial fraud and how investors can avoid being duped. Good points for any investor to take note of. The official site is linked to from my profile.

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