When the time comes to buy stocks, you will need a broker to place your order. While every broker is slightly different, most can be categorized as either a full service broker or a discount broker.
Full service brokers offer a range of services, from investment planning and asset allocation to purchasing individual stocks, bonds and commodities contracts. The benefit of a full service broker is obvious: you get a seasoned investment pro (often a Certified financial Planner) to walk you through the process of building a portfolio. The broker has access to many different investment vehicles beyond stocks, and can help you to make allocation decisions: literally, how much to invest and how to invest it, based on your resources and needs. The broker will often give you the option to be alerted of potentially good investments that the brokerage house analysts have determined are attractively priced.
This kind of guidance is helpful, but it comes at a price. Expect to pay upwards of $50 for every purchase you make, in addition to over a hundred for the advising, depending on the broker. If you purchase a front-end load mutual fund, over 5% of your initial investment will be taken off the top. Much of that goes to the broker.
That said, nothing beats having the knowledge of an experienced broker in your corner, and those with over $20,000 to invest are well advised to seek a full service brokerage. Fortunately for the rest of us, there are discount brokers.
If you determine that a full-service broker is what you need, here is a list of some of the most popular:
Discount brokers are still in their infancy, and many of them offer services similar to those of full service brokerages. They range from less expensive versions of full service brokers (including offices in multiple locations where you can meet with a broker for advice) to simple online trading platforms without any guidance at all.
Of course, most fall in between these extremes, offering some services with fees typically below $25 per trade, and some offer trades under $5. Expect to pay more for any services other than simple self-directed online trades.
The reduced price is the main benefit, hence the name discount broker. But the lack of a support system that a full service broker can offer will mean more research for the individual investor. Blindly investing in stocks you think are sound without researching them is a recipe for disaster.
Discount brokers are a popular choice for new investors, since it is often easier to meet their standard application requirements. In Finding the Best Broker for You we focus on the main discount brokerage houses and how to determine which one is right for you.