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How Do I Pick A Brokerage Firm To Buy Stocks?

How Do I Pick A Brokerage Firm To Buy Stocks?

Competition and the Internet has brought the ability to buy and sell stocks and other financial instruments to the masses and taking it out of the realm of the wealthy elite. For decades, average investors didn't have the opportunity to participate in the stock market the way more well-off individuals could with personal connections and expensive portfolios. Technology has democratized the access to information and provided a means for anyone interested in bettering their position financially to do so. Now that we have multiple means to participate in the stock market the question is which one do you use.

Traditional Broker

If you watch golf it is guaranteed that you've seen hundreds, if not thousands, of advertisements for traditional full service brokers. This type of broker is what well off individuals have used for over 100 years to place trades and get investment advice from trained professionals. Traditional brokers focus on rich clients with millions of dollars for two primary reasons. Wealthy individuals tend to take a hands-off approach to their investments and rely on on the expertise and experience of licensed and educated investment specialists. When you hire a traditional full-service broker you're expecting specific returns or you'll take your business elsewhere. The other reason is because these types of brokers tend to more actively trade stocks it allows them to collect commissions and hopefully increase returns which can only be done with larger portfolios. Traditional brokers however are expensive and are exactly why many smaller individual investors were not able participate in the stock market for many decades.

Discount Broker

Discount brokers became more popular during the financial boom of the late 80s and early 90s as electronic trading became more prevalent driving down costs. This allowed more brokerage firms to compete on price which encouraged smaller investors to participate in the stock market. Not only were the commissions for placing stock trades dropping precipitously but these no-frills brokers also didn't offer investment advice or portfolio management. The onus was on the individual investor to conduct research and analyze performance reports and financial records to select stocks of their choosing. As a result, many individuals who had little to no experience in the stock market were now able to participate. However, if something went wrong the failure rested squarely on their shoulders and not their brokers.

Online Broker

Online brokers, which only came to prominence as a result of the Internet, are a direct result of computer automated trading systems and tech savvy customers. While more full service traditional brokers are still available to larger investors, discount brokers have all but disappeared and been replaced by online brokers. This is because online brokers can provide even lower prices on trading commissions while providing additional resources for analyzing investments. The responsibility and weight of making trading decisions still rests with the individual investor but even more access to SEC filings, analyst ratings and community feedback have made more traditional brokers unnecessary. Online brokers also offer for additional expense, services more closely resembling traditional brokers such as individual portfolio managers and professional investment advice. It really is a marriage of the best of both worlds in terms of low-cost access to trading with as much or as little investment assistance as you need.

Summary

When an individual investor picks a brokerage firm to buy stocks, any of the nationally recognized companies will satisfy their needs. Influencing the decision will be personal preference, feedback from friends family and professional contacts, prices and fee structures and access to financial information including charts and analysis. The best thing to do is to read multiple sources reviewing the various brokerage firms including customer feedback and quantitative scoring. At that point go with a brokerage firm you feel satisfies all of your requirements to start investing in stocks.

Image by: Wally Gobetz