HOW PICKING A STOCKBROKER
Stockbrokers come in many shapes and sizes. Some act as nothing more than a tool to receive the independent chimp’s stock orders. Others play a very active role in the investment strategy of their clients. Still others act as salespeople and can become very obnoxious and pushy.
Deciding what kind of broker is right for you can be a difficult undertaking, especially if you have no prior investing experience. Should you get an electronic broker first or wait a while? Do you want investment advice and stock ratings from your broker? Perhaps the two most important considerations are what makes you comfortable and what seems the most convenient. Don’t be discouraged if your first broker or even your first several brokers don’t work out. Be careful whom you pick to help you invest your hard-earned banana.
IF YOU’RE READY TO TRADE
So you’ve decided you’re ready to trade. You’ve got some risk capital, you’ve got some knowledge, and now you need an account. What are your choices? Nowadays, the major decision is to choose between online or traditional brokerage. Most online brokerages are considered discount brokerages because they offer low trade commissions and they don’t contact you often. If you’ve decided to use an online brokerage, then read on.
Where to Look
Names of popular online brokerage firms can be found in newspapers, television, magazines, and on the Internet. If you want a fairly comprehensive list of reputable online brokers, check out an Internet directory such as Yahoo!. Try looking in the Financial Services section for “Brokerage Firms” or “Brokerage Houses” and then under the “Electronic” or “Online” subcategory.
What to Look For
There are several major factors you should consider when choosing a brokerage firm. First of all, many brokerages have minimum starting account balances that you must meet in order to open an account. Depending on which firm you choose, this requirement may be as low as $500. And, depending on how much risk capital you have, this may be a major factor in opening an account.
Another very important factor is commission rates. If you have an account with a small amount of capital, it’s important to keep commission rates as low as you can. There are several ways to do this. Some brokerage firms advertise extremely low commission rates, but you may notice that once you’ve signed up you’re not getting those rates.
This may be due to the fact that those low rates are usually special offers. They apply to people who have a certain balance in their account, people who trade more than a certain number of times in a given time period, and so on. Before you set up your account, call the brokerage firm and actually talk to a broker. Try to bargain, and see if they can set up a lower commission rate for you.
Some stock brokerages offer more than others. And contrary to what your logic might tell you, the more expensive brokers don’t always offer more services. That’s why it’s important to shop around. Some brokerages will offer free real-time quotes, while others may charge a fee for quotes or require certain trading activity to receive them. Others may offer the option of automated telephone trading as well as the option of placing orders over the phone.
Also offered may be investment information services, which could help the average chimp learn about the basics of using a broker, investing, as well as news services and other catchy benefits. If you’re a big traveler, some brokers offer airline “miles” for trading or discounts on credit cards linked to banks associated with the brokerage firms. Check around; there’s no shortage of deals that could save you big bucks.
WHY ARE COMMISSION COSTS SO IMPORTANT?
To put it simply, it’s all relative. Let’s pretend that I open an account with an initial balance of $10,000. The starting commission rate at my brokerage firm is $20 per trade. When I make one trade, I’m spending .02 percent (or $20) of the money in my account to make that trade. However if I have $500, it’s a different story. Making one trade with a $20 commission requires that I spend 4 percent of the money in my account for every trade. That means that unless I make more than an average of $20 per trade, I will only be able to make twenty-five trades or fewer before I spend all the money in my account!
DO YOU NEED ALL THE FREE STUFF?
Not at all! Of course it’s nice to have free stuff. And, you might be really jealous when you see your coworkers taking advantage of their real-time, streaming quote, or trading right from their desk. However, too much information is more distracting than you may realize. Brokerage firms exist to generate commissions by executing your trades. As we’ve said before, you should be the one making the decisions about your trades, not brokers, not analysts, and, above all, not your emotions. So when you decide not to overstimulate yourself with loads of information, you are actually doing yourself a favor and making it easier to win the game.
WHAT’S THE DIFFERENCE?
There are two major categories of brokerages: full-service and discount. Increasingly, banks offer investment services as well, so if transferring money from account to account isn’t your cup of tea, try asking about this at your local bank. Choose your brokerage firm according to your style of investment. Ask yourself if you would feel better with an investment adviser and/or broker on the other end of the phone, or if you would feel just as confident without even talking to a person at all.
Full-service brokerages serve several purposes. First and foremost, they act as the go-between for buyers and sellers of stocks (this is the major purpose of any brokerage firm). Second, they act as a resource for individual investors. If you sign up with a full-service broker, don’t be surprised if some baboon gives you a call to tell you about hot stocks in which you should invest your bananas.
But be aware that these baboons are often like used-tree-house sales people; they may have ulterior motives. Your stockbroker may be asking you to buy a stock, which his or her brokerage firm is trying to move “off the shelves.” This would occur when your brokerage firm has been involved in the public offering of a company, or has a large number of shares that it needs to get off of its hands. In fact, brokerage houses often pay their brokers bonuses to push stocks like these.
If you’ve signed up with a full-service broker, don’t start hooting and hollering just yet. The stocks your full-service broker will tell you about will not always be “good” or “bad,” nor will they usually be stocks the firm has asked them to move. But always keep in mind that one of our cardinal rules of investing is that a market monkey should choose stocks for him or herself.
Discount brokers are divided into two subcategories: discount and deep discount. Discount and, to an even greater degree, deep discount brokers primarily facilitate the buying and selling of stocks. You will practically never have discount brokers call you and tell you about a stock. However, you may receive free materials, newsletters, or investment tools to help you make decisions on investments. Be aware that if you sign up with a discount broker, you will be in an extremely independent investment decision-making environment.
The major difference between all three types of brokerages beyond service is price. Brokers make some money on commissions (a fee charged for the execution of a trade). When a stockbroker assists you in deciding what to buy or sell, there will normally be a larger commission fee than otherwise. Solicited trades (when a broker asks you to buy a stock) will also cost you more. If you don’t have a lot of cash in your account to start with, try to get the lowest trading fees possible. Chimp Elliott’s advice is to stick with a discount broker and make your own trading decisions once you have learned the basics of trading and order placement.