A stock broker is a middle man between the stock market and the stock trader. He facilitates the trades of the stock traders.
A peculiar feature of the stock market is that a trader can neither directly find the sellers if he wishes to buy a stock, nor buyers if he wishes to sell his stock. The whole process of buying and selling the stock takes place through offices of the stock brokers.
Broadly speaking, there are two types of stock brokers. They are full service stock brokers and discount stock brokers.
The full service stock brokers, as the name suggests, provide a complete range of brokerage services. They provide advice to their clients about which stocks to buy or sell. They advise the traders about when to buy or sell stock and how long to hold it.
Full service brokers provide education to their clients about the whole process of stock trading. You can read tutorials about the various aspects of stock trading, the stock trading lingo, bear and bull markets and so on.
The websites of the full service stock brokers have research tools and research facilities for the clients. These research tools consist of symbol finders, news flashes, charts for analytical and fundamental research. The stock brokers also send news letters to their clients about the latest stock market trends which help to predict the stock market movements.
All these facilities provided by the full service stock brokers come with a price. Full service stock brokers charge the highest commission rates in the industry.
If you are a new entrant to the stock market, you must opt for the services of a full service stock broker. As a “newbie”, you do not possess the required knowledge, confidence and expertise in stock trading.
The second type of stock brokers is discount brokers. As the name suggests the discount brokers give discount on their commissions. Their commissions are lower than those charged by the full service brokers.
The reason why the discount brokers charge lower commission is that they do not offer trading advice and similar other facilities to their clients such as research and analysis tools.
A discount broker just performs a single task. He executes the trading orders of the clients, buying or selling orders and limits or stopping loss orders. There are no trading recommendations, no hot tips.
Those who seek the services of discount brokers are generally experienced traders. They know how to take their own trading decisions.
The least expensive brokers are the online stock brokers. Online stock brokers do not incur lots of overhead charges. They can, therefore, afford to charge lesser commissions on their services.
Since it is easier to set up online brokerage firms, many brokers have jumped into the market. There is a huge competition; therefore the commission rates are lower in online stock trading.
Stock brokers generally offer two types of accounts to their members.
One is ‘cash account’. In cash account, you are offered no credit. You have to pay full amount when you buy a stock.
The other type of account is ‘margin account’. You can buy a stock on margin. You do not have to pay the full price of the stock. The stock broker allows you to pay a certain percentage of the price of the stock. The remaining price is paid by the brokerage firm.
The amount of margin varies from broker to broker “but the margin must be protected by the value of the client’s portfolio. If the portfolio falls below a specified amount the investor will have to add more funds or sell some stock.”
It must, however, be noted that since margin accounts enable the investors to buy more stock, they may make greater profits or suffer higher losses. Margin accounts, therefore, are not recommended for the new and inexperienced traders.
How to choose a stock broker?
As is clear from the above discussion, you have to understand your personal qualifications in stock trading before you choose a stock broker. If you are an experienced stock trader and you need no hot tips and stock recommendations, you may opt for a discount trader.
If you are a new entrant to stock trading, you must do a thorough search on the internet before choosing a stock broker. Draw a list of features, facilities, services, minimum account deposits and commission rates that are offered by a number of stock brokers and do comparison shopping on each count.