One of the most important decisions you have to make as an investor is to choose a good broker. Opening a brokerage account is perhaps the key to half-way success in investing given that a new account agreement is, in effect, a three-fold decision that concerns: (1) who is responsible for the final buy-and-sell decisions, (2) how you will pay for your investments, and (3) what is the level of risk you are willing to undertake.
(1) Normally, you are the one to make the final investment decision unless you appoint discretionary authority to your broker, allowing him to invest your money without consulting you for issues of price, timing, and amount. In this case, you have to consider the risks involved in giving full control to a third party over your money.
(2) Normally, you have a cash account out of which you pay in full for each security you purchase. However, there are investors who prefer margin accounts, which means, they borrow money to purchase stocks. If the market declines and the stock prices fall sharply, the stockbroker has the authority to sell any security in the margin account without prior notice to cover any loss resulting from the declining value of the security. In that way, you may end up owing large amounts of money to brokerage firms even after your securities are sold.
(3) Typically, the level of risk that you are willing to undertake is related to your investment objective that has to be clearly stated in the account agreement. This means you should be aware of terms such as ‘income’, ‘growth’ and ‘risk’ and be certain that the level of risk you undertake accurately reflects your investment goals.
What You Need To Consider When Opening A Brokerage Account
Stockbrokers are not only responsible for trading. They are also responsible for providing good investment advice, executing orders in the proper timing to take advantage of the market conditions and providing accurate information about margin interest rates, fees, and commissions.
Here’s what you need to consider when opening a brokerage account:
Level of service
There are full-service brokers and discount brokers. If you decide to open a brokerage account with a full-service broker, you will be working closely with a personal stockbroker, who will focus on your needs and will offer ideas on how these needs can be met. Besides, your full-service broker will prepare portfolio reports providing you with an idea of your returns and overall investment performance. Full-service brokers are available 24/7 to buy 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 so that you can make well-informed investment decisions, full-service brokers charge higher commission fees than discount brokers, but you are offered the safety of professional management.
On the other hand, discount brokers do not provide investment advice. They execute buy/sell orders and they do not work on a one-to-one basis with you. Instead, you do most of the trading online. Today, there are numerous online trading platforms that charge low commissions and you can use them for trading on your own.
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. Therefore, do your research and compare brokerage firms before opening a brokerage account because, in some cases, a higher commission may insinuate superior service and faster order execution, but it may also mean nothing.
All brokers offer investment tools, research tools and such, but it’s a matter of what is important to you to choose a broker based on these criteria. For instance, if execution time is important to you, it makes sense to check on the broker’s policies. If you are more interested in checking your portfolio performance, you should select a broker that offers portfolio analysis, dividend records, account balance and portfolio profits.
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, if you are more sophisticated and look for more sophisticated investment vehicles such as ETFs, options, commodities or currencies, you should go for brokers that are specialized in derivatives trading or currency trading. It is definitely a better option to go to a specialized broker than to trust a broker that trades a little bit of everything.