Brokers Place in Online Stock Trading

Why we still need a broker for online trading?

Brokers share the undesirable reputation of lawyers, bankers and accountants. They earn a living by selectively sharing knowledge that the general public can’t easily access. But, like it or not, they are the individual investor’s direct link to Wall Street. Although technology and the internet have made it easier for individual investors to take control of their portfolios, the basic rule still applies: you need some kind of professional broker to trade stocks and bonds. Brokers are the people who handle customer orders to buy and sell securities. In the same way that a grocery store acts as a middleman between shoppers and the companies that produce food, a broker acts as a middleman between the securities that trade on the market and the investors who buy them.

The most important thing to realize is that brokers are salespeople. They get a commission when you trade.

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What we need to open trading account?

Every brokerage has different terms and conditions for opening an account. There is a wide range of minimum deposits, varying anywhere from $500 to $2,500. Make sure you read the fine print beforehand. There is nothing more irritating than spending the time to fill out application forms only to discover you don’t have enough money to open an account.

So, you’re not loaded? Don’t worry, more and more online brokerages don’t require a minimum deposit at all.

Another option for those with small bank accounts is a dividend reinvestment plan (DRIP). A DRIP allows you to circumvent brokers by buying stocks directly from the companies that offer them.

How much I need to pay my broker in commissions and fees?

Every brokerage charges a different price (called the commission) to trade. The price is usually indicative of the service, so cheaper isn’t always better.
  • The dirt-cheap brokers who charge $5 to $15 per trade get the job done. Prices are going down all the time and quality is getting better, but don’t expect great support or perks.
  • The mid-priced discount brokers typically charge anywhere from $15 to $30 per trade. These brokers generally offer better customer support and additional services.
  • Expensive brokers come with high costs. In some cases you can expect to spend upwards of $100 to $200 per trade. These brokers are known as full-service, and we’ll discuss them in greater detail in the next section.
The prices above are a very rough guide. Commissions on trades vary based on things like the type of trade (e.g. market order versus limit order). Even the method used to do the trade affects the price; commissions are different for online orders, touch-tone phone trades and broker-assisted trades. 


Should I worry of any hidden fees?

In general, the financial industry is excellent at hiding fees and charges under a layer of jargon. Beyond the commissions per trade, look for the following:
  • Fees for transferring assets both into and out of an account
  • Account maintenance fees
  • Inactivity fees
  • Fees for not maintaining a minimum balance
  • Interest on margin loans.
  • Sales charges on certain securities (e.g. loads on mutual funds)
Make sure you shop around, but bear in mind that many of these fees are standard across the board.



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What kind of services can I get from full-service broker and discount broker?

The full-service category includes all the names that spring to mind when we think of brokers: Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean Witter and others. They provide a variety of services, such as personal advice, retirement planning and tax tips. Full-service brokers offer a wider selection of investment products such as derivatives and insurance, as well as access to the company’s research. All this comes with a hefty price tag. Full-service brokerages are expensive, with commissions around $150. Furthermore, full-service brokers are compensated based on how much you trade, not the performance of your portfolio. This can lead to your full-service broker advising you to trade against your personal interests. That is considered as fraud and it is called churning. 

Discount brokerages charge a reduced commission and do not provide investment advice. The best-known discount brokers are Charles Schwab and TD Waterhouse. Fees are kept low because discount brokers offer fewer products. Brokers are paid on salary and not on commission. The business model is built on having an effective system and quality service in order to put through the most volume. 

Deciding whether you need full-service or discount is your first step. The choice is up to you, but taking charge of your own portfolio can be a very rewarding and profitable experience. On the other hand, full-service brokers also have their time and place. Although you’ll pay more, losing money on commissions is better than wiping out your portfolio because you don’t understand the market. The bottom line is that the type of broker you choose should be based on your individual needs. 


What are the account types I can open at the Brokerage? 

Depending on what type of securities you hold, there are four major choices you have when opening an account:
1. Cash Account: The basic account where you deposit cash to buy stocks, bonds, mutual funds, etc. 
2. IRA Account: For people looking to set up an individual retirement account. 
3. Margin Account: Margin basically allows you to borrow from your broker against the cash and securities in your account. Profits can diminish quickly when you use margin, so be very careful!
4. Option Account: Only seasoned investors should consider this choice. This type of account allows you to trade options, which are much riskier investments than stocks or bonds. 


What type of orders can I execute with the broker assistance?


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In order to make your trade you have to be specific about how you want the transaction to be performed. The following are common order types you’ll encounter when placing equity order using an online interface or the phone: 
1. Market Order: An order that requires immediate execution at the best price available. These are generally the cheapest trades to place because there is little work or maintenance required by the broker. 
2. Limit Order: An order to transact at a specified price. This guarantees the price at which you will buy or sell a security. Limit orders are usually more expensive than market orders. 
3. Stop Order: A market order that trades after a specified level has been reached. This may be a stop-loss or stop-limit. The exact price cannot be guaranteed, but this can be a good way to protect your downside. 
4. All or None (AON): A stipulation on a limit order either to buy or sell a security only if the broker can fill the entire order, not part of it. 
5. Day Order: An order that expires at the end of the business day if it has not been filled. 
6. Good till Canceled (GTC): An order either to buy or to sell a security that remains in effect until the customer cancels it or until it is executed by the broker. 
7. Fill-Or-Kill: An order for immediate execution. If it cannot be filled immediately the order is automatically canceled. 
8. Short Sale: Short selling is an advanced investing technique in which stock is borrowed and sold with the hopes of returning the stock at a lower price. 
9. Buy to Cover: An order placed to close out a short position.
Since type of the order will require different fees, you might think first what you are planning to do in general on the stock market. Broker choice might depend on this decision, related to the expected amount of monthly trades and preferred order type.

Source: http://www.investopedia.com/university/broker

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