Trading Brokers and Brokerage Services

Before you can pick the type of broker that best fulfills your trading needs, you need to understand the kinds of services that each kind of broker provides. After you gain an understanding of your options and select the types of services you want, you then need to carefully research each of the brokers that match your needs.

Full-service brokers

If you want someone to assist you with buying decisions and implementing those decisions, you need to check out the full-service brokers. They offer extensive research and other services. Usually, they call you with trading ideas. All you need to do is say yes or no.

You pay a transaction fee for trades plus a commission percentage based on the dollar volume. You can invest in stocks, futures, options, bonds, mutual funds, money-market funds, and variable annuities. You can work with a full-service broker by telephone, mail, fax, or Internet. Most have websites you can access for information, and many allow you to enter your own trades.

Here is an example transaction fee schedule for one of the better-known full-service brokers (others can be as much as twice as high):

Transaction Size Commission Rate
$0–$6,000 2.5% of principal
$6,001–$10,000 $30 plus 2% of principal
$10,001–$25,000 $80 plus 1.5% of principal
$25,001–$100,000 $205 plus 1% of principal

Alternatively, some full-service brokers do permit you to make all the trades you want per year for a fee of 0.30 percent to 2.5 percent of the total assets in your brokerage account.

Unscrupulous brokers recommend trades to their customers to generate new commissions even when those decisions are not necessarily the best investment advice for their clients. This practice is often referred to as churning.

Just because you choose to work through a full-service broker doesn’t mean you can sidestep doing your own research. You always need to perform due diligence, independently researching your stock purchases.

Discount brokers

Many discount brokers offer the same services as full-service brokers, including research. The big exception is that you don’t get individual attention or unsolicited advice on what to buy or sell. Some discount brokers send out monthly newsletters with stock recommendations; most don’t trade futures or sell variable annuities. In order to get the lowest fees on trades, you need to do your own trades by accessing the broker’s website.

The big difference to you, as an individual trader, is that you can save a lot of money on trading costs, provided you know what you’re doing and you understand the language of stock trading.

Direct-access brokers

If you want to bypass the traditional brokers and trade directly through an exchange or market maker, you need to open your account with a direct-access broker so you can use one or more of the electronic communications networks (ECNs) to make your trades. Traders usually download software onto their PCs so they can access the ECN directly using their Internet connections.

Traders using direct-access brokers typically get real-time Nasdaq Level I quotes, which show the latest bid and ask prices, quote size, the last trade, and volume.

Direct-access brokers also offer Nasdaq Level II. Nasdaq fees are higher for Level II, and the brokerage may also charge an additional fee for this type of access. In addition to what you see in a Level I quote, you also find the number of market makers participating in the market for any one stock.

A Nasdaq Level II quote screen shows the best bid price and the best ask price for specific stocks from participating market makers. All the bid and ask prices are ranked from best to worst. Some direct-access brokers combine Nasdaq Level II information and ECN book data to show the complete market depth for a specific stock.

Traders can review the quotes and select which market maker or ECN to use for each transaction. Most full-service and discount brokers make that choice for you when you’re working with them. A few discount brokers are providing access to ECNs.

When working with direct-access brokers, one key difference is that the software you use may reside on your own computer and not on your broker’s server, which greatly accelerates the speed at which you can trade.

Working with a direct-access broker gives you a steady stream of raw financial data — the actual trades, current bid and ask prices, trading volume, and market statistics. The trading software that you load onto your computer determines how this data is organized and presented on your computer monitor. Providing better access is how direct-access brokers distinguish their services from other brokers.

Proprietary trading firms

Proprietary (or prop) trading firms enable traders to use at least some of the firm’s capital in addition to or instead of their own. Depending on the firm, traders share the gains and may share the losses. You can’t just walk in and expect to trade with one of these firms. You must have an NASD Series 7 license combined with a proven history of trading in the equity markets.

Some proprietary trading firms may also require that you have a Series 55 and Series 63 license. The firm you work with trains you in its trading style, but proprietary trading is not usually for beginners. Some proprietary trading firms do offer to bring in beginners or relatively inexperienced traders to train who do not meet licensing requirements up front, but the fees for this training can be steep.

Futures brokers

Unless you’re working with a full-service brokerage firm, you may have to open a separate account with a futures broker if you want to trade commodities or other types of futures. Futures brokers must be licensed by the NASD in a way that differs from stockbrokers. Many direct-access brokers provide futures brokerage services, but you can’t always find them at a discount broker.

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