If you use a brokerage, it's useful to understand the difference between full-service brokers and discount brokers. Think of it this way: When dining out, your choice of restaurants ranges from Bob's Burger Pit to Chez Maurice. At Bob's, your meal is handed to you in a bag, along with change for your five. At Chez Maurice, your napkin is fluffed onto your lap and the bill bears a remarkable resemblance to your mortgage payment.
You have a similar choice with brokerages -- you can decide between the increasingly popular discount broker and the traditional full-service broker.
Advocates of full-price (er, full-service) brokers assert that you get what you pay for. Full-service brokerages such as Merrill Lynch
It's hard to determine commissions charged by full-service brokerages, since they don't like to publish rate schedules. It's safe to say, though, that for many of their customers, commissions have run up to 5% or more of the value of a trade. For example, it might cost about $280 to buy or sell $8,000 of stock. (To be fair, though, many brokers have introduced lower rates in recent years.)
At the other end of the spectrum, offering little in the way of advice or hand-holding, are discount brokers such as discounters Ameritrade
Full-service brokerages offer everything from stocks and bonds to annuities and insurance. Since their brokers profit largely from commissions, they're sometimes motivated to encourage a lot of buying and selling that isn't in your best interest. Other times, they might just toss your money into a mutual fund and forget about it. There are many good brokers at full-service brokerages, though, who keep your best interests in mind and do a bang-up job for their clients. If you're taking the full-service route, you simply need to determine just how good a job your broker is doing for you, and if the cost is worth it. If you have a broker you like who's doing well for you, sticking with him or her might be a good idea.
Discount brokerages have traditionally offered a narrower range of services, but they've been adding significantly to this range in recent years. Today, many discounters offer mutual funds, banking services (such as checking accounts), IRAs, mortgages, stock research, and more. Some even offer fee-based portfolio consultation and investment advisor services for some clients. Discount brokerages tend to compensate their brokers mainly with salaries, not commissions, and make their money through high-volume trading.
Assess what services you need from a broker and how much you're willing to spend. If you're a do-it-yourself investor, get thee to a discount broker. You'll probably save enough for a meal at Chez Maurice.
You can learn all about brokerages and find one that's right for you by visiting our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)