Buying And Selling Investments
Securities are a highly regulated product that can only be bought and sold within approved stock markets (such as the NYSE or NASDAQ exchanges, both located in New York City). Not just anyone can participate in these exchanges, either. Only registered traders are allowed to actually trade securities. Traders are employed by numerous securities brokerages, which make a business out of enabling regular people to execute trades on these exchanges. Anyone with the proper resources to invest can open an account with one of these brokerages, and place trade orders. Brokerages typically hold the stock coupons that are purchased on behalf of account holders, and take a commission for each trade executed.
Full-Service vs. Discount Brokerages
There are two main types of brokerages available today: full-service (traditional) brokers and discounts brokers. A full-service broker can offer you in-person assistance from a financial advisor who will assist you in deciding where and how to invest your money. This person will be your point of contact for buying, selling, and getting information about your investments. Costs for this one-on-one service can be expensive.
A discount brokerage house will generally not offer one-on-one service, but compensates for this lack by offering a much lower cost for trading services. Discount brokerage houses cater to a large volume of customers through a centralized customer service center. Investment advice tailored to specific individuals is typically not available and buying and selling transactions are handled via telephone or online via a website or computer program.
Apart from service and advice, the main difference between full-service and discount brokers is cost. Full-service brokers offer individual attention and charge a premium for it. Discount brokers charge anywhere from $8 to $30 per transaction. The difference in cost sometimes correlates to the speed with which trades are executed, but sometimes it does not. Price differential can also be explained by the investment research available to customers. Full-service brokers offer customers detailed financial research about the different investment options they offer to help customers make informed choices. Discount brokers rarely offer research and if it is available, there may be a fee to access it.
Another difference between full-service and discount brokers is the amount required, if any, to establish an account. Many full-service brokers require an initial investment of $2,000 to $10,000 or more for the mere privilege of opening an account with them. Most discount brokers do not have minimum investments amounts, which is a boon to those with little cash to invest. The downside is that you may end up paying recurring maintenance fees for this low cost access to the exchanges.
Look out for "Churning'
Be on the lookout for 'churning' when working with a securities broker, or other investment counselor who may have access to your portfolio. Churning occurs when investments are bought and sold excessively without regard to the investment goals of the customer. Unscrupulous brokers sometimes engage in churning to generate commissions which are the primary source of their income. Often, a sign of churning is when one investment is sold for another of like kind without justification. Churning can cost the investor greatly. Take note if your broker seems to be actively buying and selling investments on your behalf without your knowledge, and put a stop to it immediately.