Stock Brokers and Online Stock Trading

To start investing, the first thing you must do is go out and find a stock broker. A stock broker is a person or brokerage firm that does the actual buying and selling of your shares on the stock market. As an individual, you can’t trade stocks – or bonds, or options, or futures – unless you go through a broker or are a broker yourself. Nowadays, online brokers and direct-access brokers enable you to make trades electronically, so you never have to speak with a human being unless you require a bit of customer service.

When you find a stock broker you like, the first thing you do is open an account with them, much like you would do at a bank. The difference is this account will not only hold your money, but it will also manage investments such as stocks, bonds, and mutual funds. When you buy shares of a company, money will be taken out of your account and made into company shares. When you decide to sell your company shares, the opposite will happen: your shares will be changed back into money.

When choosing a broker, find one that is based on the level of individual services you want. The more services you want, the more you will pay for your ability to trade. There are many levels of brokers: on one side is the full service broker who does a lot of hand-holding, offers stock research and advice, and other human-based services. On the opposite side are direct-access brokers, who offer few human-based services and instead provide extensive trading platforms for you to trade electronically on real-time basis. The differences are further explained below.

Look Beyond the Fees

When choosing a broker, do not choose purely on the basis of price. You need to know what types of services they offer and see if it fits in with the type of trading you wish to do. When researching brokers, check out the types of orders supported, whether they can offer you a data feed, what types of charts they provide, and whether they can give you ECN access if you want to make your own trades electronically. If you want to trade infrequently, your best bet is either a full service broker or a discount broker. Making the choice between full service and discount brokers depend on how independently you want to operate as a trader. And if you feel you are comfortable enough with the language and mechanics of trading and know how to conduct your own research, a direct-access broker might be right for you.

Full Service Brokers

If you are new to stock trading or need assistance with buying decisions, investment recommendations, or need someone to implement those decisions, a full service brokerage firm is your best bet. Often they will call you with trading ideas, and all you need to do is say, "Yes," or "No." But there is a price to pay for these recommendations, you pay transaction fees for trades, plus a commission percentage based on dollar volume. These services are usually only suitable for investors with a great deal of money to invest and who do few trades, otherwise you might end up paying the broker most of your profits.

Discount Broker, Online Stock Trading

Most discount brokers offer the same services as full service brokers, including research. A discount stock broker can answer investment questions you may have, but don’t offer individual attention, portfolio advice, or unsolicited recommendations on what to buy or sell. Some discount brokers send out monthly newsletters with stock recommendations to their clients. It is not hard to find an online discount broker.

The big difference 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. With a discount broker, transaction fees for online trades can range from as low as $5 up to about $30. When you buy or sell stock, you will be paying this lower commission rate, which, of course, results in making more money. If you want special services requiring a broker’s assistance or human-based assistance, fees can range from $25 to $50 per trade. They are there to offer advice if you need them, but be ready to pay for their services.

Direct-Access Brokers

If you are familiar with the trading world, then you might want to bypass the traditional brokers and trade directly through an exchange or market maker. For this type of trading, you need to open an 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 to their computers so they can access the ECN directly using the Internet . Software prices and access fees vary greatly and can cost as much as $300 a month. The fees sometimes can be waived, especially if your trading volume is high enough – typically about 50 trades or more a month.

Traders using direct-access brokers typically get real-time NASDAQ Level I quotes, which show the latest bid and ask prices, volume, quote size, and the last trade. Direct-access brokers also offer NASDAQ Level II, which in addition to Level I access, can find the number of market makers participating in the market for any one stock. NASDAQ fees tend to be higher for Level II and the brokerage may also charge an additional fee for this type of access.

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 software you load onto your computer determines how this data is organized and presented to you. In fast-moving markets, it’s easy to miss a trade at the price you want, especially if your connection is slow. With a good computer and a fast Internet connection you can further guarantee your trading.