What you need to know before opening a brokerage account
One of the most important decisions for an investor is to choose a good broker. Opening a brokerage account is perhaps the key to half-way success in investing considering that stockbrokers are not only responsible for trading. They are also responsible for giving their clients good investment advice, being knowledgeable, executing in the proper timing to take advantage of the market conditions and providing accurate information about margin interest rates, fees and commissions. However, choosing a good broker requires taking into consideration several factors.
The first thing to consider is the level of service required from an investor. There are full service brokers and discount brokers. Investors, who open brokerage accounts with full service brokers such as Morgan Stanley or Merrill Lynch, work with personal stockbrokers who focus on their needs and offer ideas on how these needs can be met. Besides, full service brokers prepare reports for individual portfolios providing investors with an idea about their returns and overall investment performance. Also, considering that many investors invest in foreign markets, full service brokers are available 24/7 to or sell stocks, bonds or mutual funds or reply to any inquiry, concern, idea, or suggestion. Because they offer exclusivity and a variety of resources to investors in to make well-informed investment decisions, full service brokers charge higher commission fees than discount brokers, but investors are offered the safety of professional management.
On the other hand, discount brokers do not provide investment advice. They execute /sell and they do not work on one-to-one basis with the investor. Instead, the investor does most of the trading online and when he calls in the brokerage firm, the first available broker takes the . E-Trade and Ameritrade are discount brokers that charge low commissions in case an investor comes in contact with a broker.
The second consideration when opening a brokerage account is the commissions charged. As already explained, one major difference between full service brokers and discount brokers is the commission they charge for their services. However, there are also differences in commissions between two brokerage firms of the same type. For instance, one discount broker may charge $7.99 per trade, whereas another may charge $14.99. Therefore, investors need to do their research and compare brokerage firms before opening a brokerage account because, in some cases, higher commission may insinuate superior service and faster execution, but it may also mean nothing.
A third consideration is the amount of trading taking place. Many full service brokers offer a discount for accounts that trade several times per month up to a certain amount. If an investor trades less during a month, he/she should look for brokerage firms that charge a base price. Besides, other brokers charge a fee for investors that do not trade at all over a certain period of time. Overall, a thorough research is the first step before choosing the broker in to avoid extra fees that may reduce the investment return in the long run.
A fourth consideration is investment tools provided by the broker. All brokers offer investment tools, research tools and such, but they also differ and it’s a matter of what is important to an investor to choose a broker based on these criteria. For instance, execution time is important to an investor, it makes sense to check on the broker’s policies. For someone who is more interested in viewing the portfolio performance, choosing a broker that offers portfolio analysis, dividend records, account balance and portfolio profits is the best option.
Finally, the variety of investment options is perhaps the most important consideration. In majority, brokerage firms offer stocks, bonds and mutual funds, which are the main investment vehicles for the average investor. However, there are investors who are more sophisticated and look for more sophisticated investment alternatives such as ETFs, options, commodities or currencies. There are brokers that are specialized in derivatives trading or currency trading and it’s definitely a better option to go to a specialized broker than to a broker that trader a little bit of everything.
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