Everything You Need To Know About Stock Brokers

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Everything You Need To Know About Stock Brokers

Stockbrokers are part of the core of financial markets, as they are the ones who execute trading orders on behalf of individuals, companies, and organisations. These professionals can take on various additional responsibilities and are sometimes called registered representatives or investment advisors. They are normally employed or contracted by a brokerage firm and receive commissions for their work.

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Such firms are sometimes called stockbrokers too, although this term is not perfectly accurate. This guide will explain the differences between stockbrokers and stockbroker firms, as well as the different types of each classification.

The Role of the Stockbroker

Assets and securities are primarily traded at exchanges, such as the famous New York Stock Exchange. Although you could buy certain assets, such as shares, directly from a company, exchanges make this process easier. Consider these exchanges to be exclusive clubs, only accessible by members. You cannot trade unless you are a direct member of the exchange or are part of a member firm. Exchange members, whether individuals or firms are normally licenced brokers, no matter where they operate in the world.

Until the last few decades, engaging brokers to trade on your behalf was very expensive, so most trading was limited to the very wealthy. However, with the introduction of the Internet, discount brokers began appearing, offering their lower-cost services to the masses. Discount brokers offer fewer services than traditional brokers and are there primarily to execute client orders, not give advice.

Stockbrokers continue to seek ways to reduce their workload, improve their advice and lower their fees. As a result, the past few years have seen a rise in the use and development of investor-bots, investment algorithms and other digital tools. 

What Qualifies a Person as a Stockbroker?

The requirements to become a qualified and licenced stockbroker vary from country to country. In some countries, formal licencing is not even a requirement. This guide will use the US as an example, as a similar system is in place in Europe and other developed countries.

Formal Qualifications

In order to qualify as a stockbroker, a bachelor’s degree in a related subject is normally required by those who trade on behalf of institutional entities. Applicable subjects include finance or business administration, as these help the stockbroker understand laws and regulations. Furthermore, the stockbroker should learn the principles of economics and currency, financial forecasting, accounting, and financial planning.

Applicable Licence

A registered stockbroker in the US must have a FINRA Series 7 and Series 63 or 66 licence. He or she must also be sponsored by a registered investment firm in order to work as a licenced stockbroker. Due to the increase of cross-border investments, international credentials are also growing in popularity.

Training

The best way for a broker to gain the necessary knowledge and experience in the industry is working as a broker. Schooling can only teach so much, so brokerage firms allow freshly graduated brokers to have their own clients. In what can only be described as a highly competitive environment, only the best brokers are able to survive long term and build a positive reputation for themselves. 

Stock vs. Forex Brokers

forex broker

A forex broker is very similar to a stockbroker in that he or she acts like a middle person between an investor and the forex exchange. Such brokers are also normally qualified and licenced and can work with both institutional clients and individuals.

One of the main differences between stockbrokers and forex brokers are the fees. Stockbrokers normally charge commissions whenever they execute a buy or sell order, but that is normally it. Forex brokers, especially those who offer margin trading options, make most of their money from the spread and financing.

Choosing a Day Trading Broker

Day trading is the investment practice of trading securities or assets within the same trading day or a very short time period. As its name suggests, day traders close their positions by the end of the day. Choosing the right day trading broker for you depends on your needs and preferences. For example, if you are looking to day trade cryptocurrency, you should be looking for brokers which offer the best pricing options and variety. On the other hand, if you are looking to short sell, then you’d need a broker which offers a good short list.

Choosing the right day trading broker for you also depends on how you plan to engage with the broker. Mobile apps are quickly becoming a popular option, as they allow traders to interact with their brokers and the market in real-time, wherever they are. There are several great trading apps out there, and it’s a good idea to test a few out before settling on one.

Different Types of Brokers

Depending on your investment needs and capital, you can choose to use one of three different types of brokers. Together, these brokers allow everyone, from an institutional investor to a working-class individual to access the exchange market.

Full-Service Brokers

Full-service brokers are considered to be the more traditional brokers and are normally used exclusively by institutional clients. As their title suggests, these brokers offer the widest selection of financial services, including financial planning and other advisory services. Such brokers are almost always qualified, licenced and regulated, and as a result, charge the highest fees in the industry.

Those who engage full-service brokers get access to all their experience and resources. For larger firms, this equates to dedicated research departments, market analysts and investment bankers. Select brokers also offer direct access to initial public offerings (IPO) and their own trading products.

The key selling point of full-service brokers is personalisation. Clients have a dedicated broker whom they can contact directly. Apart from executing trades on their behalf, this broker assists them by offering advice, providing information, asset management, and being their overall investment facilitator.

Full-service brokerage firms are sometimes able to offer interest-bearing savings accounts, as well as provide checking accounts and a variety of loans, both for personal and business use. They normally operate an online trading platform, but this is normally less functional than the alternative brokers, as clients of full-service brokers are normally investing for the long term.

Discount Brokers

Discount brokers are the best of both worlds solution for those looking for certain full-service broker features but at much lower costs. Depending on the size of such brokers, clients can still gain access to in-house research, access to specialised investment products and a limited number of banking products, including loans. You could also get personalised investment advice from a discount broker, however, this may be limited and not as effective as advice given from a full-service broker.

This service is offered for a considerably lower price, with discount brokers normally charging up to $10 per trade ticket. As a result, discount brokers are normally most appealing to investors looking for shorter-term, investments. Since the price per trade is still significant, traders who seek to carry out numerous trades within a short period of time do not use them, as the trading fees can easily add up.

While some discount brokers attempt to offer a personalised service, the trend has been to shift their operations online. As a result, online trading platforms of such brokers are normally more advanced than those of full-service brokers, providing additional functions and services to traders.

Online Brokers

online trading

Sometimes called direct-access brokers, online brokers support the trading decisions of active and small traders. They generally operate solely online and offer the most competitive commission rates in the industry. Although some brokers try and differentiate themselves by offering additional services, the core operations of online brokers are carried out through their online trading platform.

Online brokers boast a combination of speed and convenience, allowing traders to invest in multiple markets and use several different financial instruments. Amongst such online brokers is Plus500, a specialised CFD broker which offers over 2,000 instruments. Using Plus500 is very easy, even for novice online investors, and its mobile trading app is ranked as one of the best in the industry.

76.4% of retail CFD accounts lose money

The online brokerage industry has seen intense competition over recent years, and this has resulted in several unique features. One such feature is social trading, where you can emulate trades of successful users and benefit from their abilities, even if your trading strategy needs improvement. eToro has mastered this feature, and today offers it to investors who can use it to trade a variety of assets and securities.

75% of retail CFD accounts lose money

In order to maintain low overheads and be able to charge affordable fees, online brokers do not usually operate physical locations. Some also do away with telephone contacts, funnelling customer through web live chats and faq pages. Choosing amongst the best online brokers is important, as the ones with low ratings could potentially cost you dearly.

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