Picking a Broker

Brokers? Who needs 'em?

Well, you do. In order to buy shares of stock, you need a stockbroker to help you with the transaction. In the same way that your local electronics retailer is the "middleman" between you and computer manufacturers, the broker (also known as a stockbroker) is the link between you and the stock exchange.

What does a broker do?
To better understand what a broker is and how one operates, let's define the broker's role.

  1. A stockbroker is a salesperson.
  2. A broker works for a stock brokerage house (like Merrill Lynch or Charles Schwab).
  3. The broker's job is to carry out your transactions. (If you like Chinese food, the broker may also carry that out, but that's between the two of you.)

Common questions about stockbrokers
Q. How does a stockbroker get paid?
A. Brokers are paid by salary, commissions on sales, or a mix of both.

Q. What qualifies someone to become a stockbroker?
A. The glamorous life of stockbroker is not for everyone. Stockbrokers must pass two licensing examinations, called the Series 7 and Series 63. Successfully completing these exams allows the broker to advise you, to solicit business from you, and to execute transactions on your behalf.

In short, brokerage houses employ brokers to execute your transactions, and in the case of full-service brokers, to advise you in making your investment decisions.

Although brokers may do their own research, they're not research analysts -- not one of the people about whom you might read, "Sylvester J. Quibble of Hackensack Associates raised his estimate for Goosefeathers' latest full-year earnings from $0.19 to $0.35 per share, citing resurgence in demand for eiderdown quilts among bilingual tots." Research analysts are other folks who work for brokerages, and they're the ones doing that sort of enlightening, in-depth research of a company's business and industry.

Full-service vs. discount
There are at least 60 discount brokerage houses, and many, many full-service brokerage houses. Just like searching for a mate, not every choice is suited to every taste, so you have to be a bit discerning and choose what best suits you. Most importantly, you must decide what you need. We can't help you when it comes to finding a spouse, but we can provide a general description of the services offered by full-service and discount brokers.

Full-service brokers
These brokers tend to offer a wider variety of financial products, investment advice, and research than discount brokers. They may offer stocks, bonds, derivatives, annuities, and insurance. In exchange, they charge considerably higher fees.

Full-service brokers solicit business and are paid mostly by commissions. This means they get compensated not according to how well your portfolio does, but by how often you trade. In turn, that means it's in your broker's interest to have you trade as often as possible -- one of the main reasons why we at The Motley Fool eschew full-service brokerages.

Discount brokers
Discount brokerages offer no advice or research -- they simply transact your trades with no frills. Because they manage fewer products than their full-service counterparts, discounters charge considerably lower fees. They also often offer online order-entry services. Live brokers at these brokerages are usually paid a fixed salary to execute your trades. They don't solicit, and they aren't paid commissions. Discount brokerages make money by doing business in volume, competing mostly on price and "reliability" of the service: Whoever has the lowest prices and the best service gets the most trades.

So many brokers, so little time... which one should you choose? We Fools advocate do-it-yourself investing -- we want everyone to do their own homework and make their own decisions, so we think discount brokers are the way to go. In fact, we've even got an area devoted to helping you select a discount brokerage, where you can find a comparison of online brokerages fees and services. We think you're capable of learning whatever you need to know to invest successfully, and you can save big commission dollars in the process.

Online trading
Nearly all brokers offer online trading features. That's great for those who feel comfortable with financial transactions over the Internet, but is it right for you? It's wonderful to be able to access your account information at a moment's notice, and to place trades 24 hours a day. We like the idea of using an online brokerage account, but we also realize that some people prefer to deal with a real person when they're placing trades. Many discount brokers offer both options; in general, it'll cost more to trade via a real live human being than to do so over the Internet.

When shopping around for an online discount broker, you should ask plenty of questions about its customer service department. Online brokerage accounts are becoming easier to use, and providing more and more information. Still, you need to know how you can access your account information if you can't get online for some reason, yet still need to make a transaction. Will a "live" broker be accessible to you if you need to place a trade? What if you need a copy of your latest monthly statements for the IRS, and the web site is down?

If you're comfortable with your computer and you don't really need to hear that voice on the other end of the phone, we recommend that you go with a discount broker and trade online. If you need to hear a voice, the solution is simple: Choose a discount broker that offers telephone trading, too.

Placing an order
You've picked a broker, done your stock research, and you're ready to place an order. How do you do it? What types of orders can you place? In general, and in keeping with our overall long-term buy-and-hold philosophy, there are only two terms you need to know: "buy" and "sell."

Sound simple enough? It is, and it doesn't really need to get any more complex than that. You buy a stock because you think it's a great long-term prospect, and you only sell it when you either need the money, or feel that there's a better place to put that money.

That said, there are different types of orders. To make sure you're not bamboozled by the terminology when someone flings it at you, let's look at the major types of orders.

First and simplest are buy orders and sell orders. You simply tell your broker how many shares of a given stock you wish to buy or sell.

You can also buy and sell at market -- at the prevailing market price -- or at limit -- only at a certain price or lower. For example, you might place an order for 100 shares of XYZ Industries at a limit of $140; you're only willing to buy those shares if you can do so at $140 or less.

When selling stocks, you can also use a stop limit, instructing your broker to sell your shares if they fall to a certain price. If you placed a sell stop on XYZ at $130, your broker would know to sell your shares if they fell to or below that particular price.

If it ain't broker...
Just like the search for a spouse, finding the right broker isn't always easy, but it can be well worth the effort. Now that you have a general understanding of how brokers and brokerages work, and some of the options available to you, forge ahead and learn more about which broker is right for you.


Read/Post Comments (14) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 16, 2008, at 9:35 AM, JAReed1 wrote:

    I enjoyed the article and it had good information and I am aware of the fact you can't recommend a broker, but it would be nice if more information was given to which discount broker website was easier for the average or first time invester to understand and use.

  • Report this Comment On November 02, 2008, at 9:53 PM, kamuirei wrote:

    Quoting the disclosure agreement:

    "The Motley Fool doesn't offer brokerage services, just commentary, information, and a few silly jokes -- so please take some time to explore our Broker Center . We've tried to answer any question you might have and organized tools to help you find the right discount broker for your needs.

    You will notice, probably, that there are several brokers whose logos, trademarks, brand names, promotional material -- in short, ADVERTISEMENTS -- repeatedly adorn each and every page here in Motley Fool Brokerage Resource Center (and practically every place else on our site). The companies you see in this area have sponsored the Broker Center, which means they are paying The Motley Fool to promote their services to you. All of these sponsors are members of the Securities Investor Protection Corp. (SIPC), and all offer a full range of brokerage services. Click on "Compare Brokers" to get the skinny on each one. If you'd like to sign up with any of them, or if you want to learn more, we've made it pretty easy to just click on one of their ads and be transported magically to the spot where you can fill in your application or request more information. The more people who do so, the more our advertisers will like us and the more money they’ll be willing to pay us.

    But, hey, you're no idiot. You know that there are other brokers out there, and that many of them can offer you high quality service at competitive rates as well. We offer these quality sponsor brokers as a starting point for your comparison shopping. If one of these brokers fits your needs (and we hope one of them will) -- magnifique! By all means open an account today through our site. As always, we encourage you to do your homework and make the decision that's right for you. To extend your research beyond what we offer here, you might check out these additional Web resources.

    Whatever you do, you should remember that choosing the broker that is best for you is your responsibility and The Motley Fool will not be liable, whether you open an account with one of the advertisers on our site or with a broker named Sid, down by the racetrack. The end result, we hope, is that you'll find a broker you're happy with, open an account, and begin the exciting process of filling it with great companies! Happy investing and Fool on!"

  • Report this Comment On November 08, 2008, at 6:03 PM, oceanye wrote:

    Just bought your initial program about an hour ago and am sure I will enjoy it. I first became interested in The Fool aboiut 2 months ago, and have been waiting for what I consider the right opportunity to start. This looks like it to me!

    oceanye

  • Report this Comment On November 30, 2008, at 3:40 AM, Sergio80 wrote:

    Avoiding advice to avoid a fee is penny wise and pound foolish

    I would not advise people to take on their investments alone --- represent themselves in a courtroom or tackle any complex problem without a coach/advisor/planner

    While I am all for being an informed investor, I dont think doing it alone is the most prudent choice.

    Advice, true advice, is going to take into consideration variables which "sales people" could care less about.

    Finding a certified financial planner should be a priority before finding a "broker"

    Most "investors" incur high fees and taxes on their own anyway holding onto to thier securities for mere months and jumping in and out of funds based on short term performance

    They read about incubated funds with awesome short term (less than three year) track records and jump in with both feet...not realizing the funds are started by huge fund companies that can hand pick IPO shares and inject them into these baby funds to booth their returns (short term)

    Its a shell game aimed at enticing money to change hands....regardless of how the fund performs in the future the transactions of buying and selling off shares creates money for those involved in the process (and a tidy bonus structure for those managing the funds as a rush of new money comes in)

    Again, I am all for informed investors and minimal management fees....but to say its better to go at it alone then seek the advice of people who have chosen to specialize in planning/management seems very "foolish" indeed

  • Report this Comment On June 24, 2009, at 2:13 PM, rrr2004r wrote:

    Which broker allows the order with less then 1 cent difference for stocks larger then $1 ?

    For example orders like this : $1.2345

  • Report this Comment On December 02, 2009, at 12:15 AM, itrademax wrote:

    new features of TradeMax include

    Neutral Trend TradeMax is a full featured Vista style trade software specifically designed for active traders and investors to manage their trade data, optimize their gain/loss strategy, and prepare their Schedule D or Mark-to-Market Form(4797).

    The new features of TradeMax include

    1.) Track your trades: You can setup different investment type accounts among whole family and manage trade data over years. TradeMax tracks and categorizes trade data and security price automatically. You can view all investment accounts in one place.

    2.) Comprehensive Corporate Events Module : Recording various corporate events, such as stock splits, stock merge, spinoff and symbol changes

    3.) Powerful importing module: TradeMax has pre-defined profiles support most brokers. TradeMax also provides a flexible format reorganization algorithm which allows you to customize your own format.

    4.) Intelligent Option Cost Basis Adjustment Function: Auto- detecting Assigned, exercised and expired option, also defers cost to corresponding shares with its Option Adjustment function.

    5.) Handle Wash Sales: TradeMax calculates various Wash Sale scenarios, include but are not limited to, Wash Sale between identical securities (stocks and options), Wash Sales on an unequal number of securities and Wash Sales on Same Day Rule.

    6.) Simplify tax preparation: TradeMax can assign short trades and convert short / long position, and calculates Wash Sales automatically. You can generate Capital gains/losses report for Schedule D purpose or export *.txf file to popular tax software such as TaxCut, TurboTax.

    7.) Analyze your trading performance: You can analyze your trading performance easily with the help of WashSales Detail Report,Summary Report, Transaction Report and Daily Market Value Report.

    8.) Powerful Forex Rate Module:Auto-convert the transactions under Non-USD currency into USD figures.

  • Report this Comment On April 18, 2010, at 9:42 PM, colibri100 wrote:

    I've been reading TMF for a while now and just signed up to get it myself. I'd like to start investing and I'm looking for a discount broker. I need one who will accept that I live in Mexico and will be wiring money to my account through my bank from here. I have been told by reps. from all the brokers who advertise on The Fool that they are not licenced to set up accounts with individuals, even U.S. citizens, who live in Mexico.

    Does anyone have any suggestions as to a discount broker who can set up an account for a U.S. citizen living south of the border with savings (from a very ligitimate source) in a 2% annual interest bank account?

  • Report this Comment On November 24, 2010, at 4:24 AM, CommodityTips wrote:

    There is a huge chance that when a broker has achieved recognition, that it performs quite effectively in the market. Apart from this, popularity could also indicate experience in buying and selling. Naturally, you would surely prefer to get help from a trader that has ample understanding and expertise in the market. Through this, you would at least be sure that you're getting good help in making trades.

    http://commodity-tips-ncdex.blogspot.com/2010/11/best-free-c...

    http://www.commodity-tips-ncdex.blogspot.com

  • Report this Comment On February 11, 2011, at 10:00 AM, anonymous87 wrote:

    PLEASE READ!!! this article is simply NOT TRUE. "This means they get compensated not according to how well your portfolio does, but by how often you trade. In turn, that means it's in your broker's interest to have you trade as often as possible -- one of the main reasons why we at The Motley Fool eschew full-service brokerages." THAT IS AN EXTREMELY IRRESPONSIBLE COMMENT!!!

    Allow me to discuss my background as a way to bring some credibility on my behalf. I am a full-service advisor with my Series 7, 63, 65, health, and life insurance licenses, and I need to weigh in and tell people to disregard this article. As an advisor myself for a major firm, which I will not name, I NEVER WORK OFF A COMMISSION! Allow me to expain...my salary is $0, and I make very very little revenue off of commission..How is it possible to make a living, you must be asking, if you do not have a salary and make very little commission?

    The answer to that is I run MANAGED PORTFOLIOS!!..when you conduct your business through "managed money" your clients incur no load mutual funds and no sales charges. With that there is a FLAT FEE to manage your assets, which for me, is typically 1%. For example, if you were to bring assets to invest to an advisor like me with say, $100,000 these assets would be managed through a portfolio with an annual charge of $1,000. This keeps both the advisor and client on the same side of the table because lets say the account balance at year end is $110,000 my pay would be $1,100, but on the other hand, if I underperform and the account balance is $900,000 my payout would be $900. Sound fair?

    In other words, I am not transaction-based, which is where a lot of brokers make a living because transactions incur commission charges for buying and selling securities. I am a performance-based advisor make no mistake about it!!

    Nowhere in this article does it discuss the option of a full-service advisor managing money as a FEE-BASED account and not COMMISSION-BASED, which is somehting you can not find at discount brokerages, which i find to be completely unfair, and IRRESPONSIBLE. Please feel free to comment.

  • Report this Comment On July 03, 2012, at 1:11 PM, gomohr wrote:

    My retirement funds were transferred to a full service broker. I am already disenchanted with them. Do discount broker qualify to take retirement funds so I don't get killed with taxes if I transfer them to the discount broker from the full service broker?

  • Report this Comment On February 15, 2013, at 9:43 PM, Sumflow wrote:

    When a security like Kinder Morgan (NYSE: KMR) pays a share distribution, which stock brokers allow clients to receive and hold fractional shares in client’s accounts?

    When a cash dividend is not enough to buy a full share, which stock brokers allow clients to reinvested into fractional shares?

  • Report this Comment On June 30, 2013, at 1:37 PM, akerMoneyMaker wrote:

    I have found a good broker picking tool. You can try it here: www.brokeria.com

  • Report this Comment On September 18, 2013, at 11:45 AM, poolman823 wrote:

    How can COATES INTERNATIONAL(COTE) Videos on website. CSRV engine and water to electric process::::::GENIUS/UNIQUE/PATENTED(over 100 patents ) fly under radar@$.05/share

  • Report this Comment On October 26, 2013, at 10:29 PM, arkhibbs wrote:

    Guys,

    Check these guys out. http://brokerage.tradier.com. I opened an account with them after a lot of research. They are very cheap, good tools and provide great support - Ark

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