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Choosing a Brokerage Firm

If you’re ready to do some investing, you need a broker to be able to buy stocks, options, and pretty much anything else. Deciding on the right broker for you can be difficult. If you’ve made the rounds of the local brokerage firms you’ll notice a trend: they all charge a lot in commissions. If you start looking online you’ll notice the commissions are decidedly lower, but are these brokers a good deal or just a good deal of trouble?

Getting A Deal Is Not Always A Deal

ID-100192389A lot of folks go online in search of the deal. Why pay a commission for a trade that is essentially the same? If you’re buying 100 shares of Microsoft or Apple, does it really matter which broker you buy it through? In a sense, this strategy has merits. First, if you know which stocks you want to buy, and you’re a DIY investor through and through, then going with the cheapest broker may make sense… as long as you get fast accurate order execution.

But, what if you’re not a professional? You don’t have any experience trading? When you’re first starting out, it may pay to use a local broker – that way you get more than just the trade. You get advice about when to buy, when to sell, and when to hold. But local brokers are notorious for selling newbies junk they want to get rid of or of trying “churn and burn” which means they encourage you to buy and sell often, in an effort to generate more commissions.

Availability Is Key

One of the biggest drawbacks to choosing an online broker is availability. Online brokerages are set up for DIY investors. It assumes you already have a good grasp on investing and don’t need much help. Some online companies may provide more personalized services, but you will not have a specific person to call, you will get the next person who picks up the phone. If you decide to go the online brokerage route, check to find one with additional optional services and educational programs. You might consider checking to see if the broker works on commission many online brokers do not, so you don’t have to worry about them encouraging you to do something that is really in their best interests, not yours.

Check The Broker’s Background

What other people say about the brokerage does matter. Just as you would research a company before buying its stock, you should research a broker before giving him your money or taking his advice. Some brokers are really good at analyzing stocks, but not all of them are. Sound incredible? It’s not. Brokers are only required to pass state and federal licensing exams that certify them to sell securities. They don’t have to pass any standard test to analyze them and make profitable trades. And if a broker was really good at picking stocks, he would be doing it for his own account or working for a hedge fund not trying to sell you stocks.

Check Minimum Deposits

Some brokers have minimum deposits that are above your means. Expect $500 to $10,000 or more minimums.

Make Sure The Right Products Are Available

Do you want to trade stocks, options, or bonds? All three? Make sure your broker trades them all. Not all brokers want to cater to every investor. They may only offer one or two types of investments. Fortunately, figuring out whether your broker deals in the investments you want is pretty easy. All you have to do is ask.

Extras Worth Considering

Some brokers will try to entice you by offering you $100 to start trading once you make your initial deposit. Other brokers will offer you free trades if you maintain a minimum balance. Still other brokerages offer personalized service – including discounted personal trades (i.e. you get help with your trades via a real broker).

But don’t just jump on the bandwagon with someone who is offering you free trading. Choose a broker that offers you services that you know you’ll use. For example, if you’ll be trading mostly mutual funds, look for brokers that offer free trades on these investments. But, if you’ll be trading mostly options, what does it matter that you get free trades on funds or even stocks?

Customer Service Counts

What good is an online broker if he doesn’t have good customer service. Some companies excel at this. Others, not so much. One way to test out the customer service is to call their trade line and pretend to be a customer. How long were you on hold? Once you get a broker on line, they will want to know your account number. At that point you will have to tell them that you are considering their firm. Tell them you don’t want to talk to sales but just want to ask them some questions. A good company will answer your questions about how to execute trades and what types of services they can provide.

If you choose an online brokerage there are basically two ways to execute trades, you can enter them via an online computer platform or you can call the broker to execute them for you. If you have questions, calling will get you the most assistance, even it it is technically an “online” brokerage.

You may also like:

The Neatest Little Guide to Stock Market Investing: 2013 Edition One Up On Wall Street: How To Use What You Already Know To Make Money The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market Choose Stocks Wisely: A Formula That Produced Amazing Returns

Jarryd Harden is a veteran in finance. He enjoys blogging about money management and smart investing.

Image courtesy of D.D. Pavumba/ FreeDigitalPhotos.net

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Comments

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