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Online Brokers 101: How to Choose Between Full-Service and Discount Options



Online Brokers Explained: From Stock Certificates to Full-Service and Discount Brokerage Services

If you want to invest in the stock market, you need a broker. A broker is a person or a company that acts as an intermediary between you and the exchange, where stocks are bought and sold. Brokers provide you with access to the financial markets and help you execute your trades.

But not all brokers are the same. Depending on your needs and preferences, you can choose between different types of brokers, such as full-service brokers and discount brokers. In this post, we will explain what these terms mean and how they differ from each other.

What are stock certificates?

Before we dive into the types of brokers, let’s first understand what stock certificates are. A stock certificate is a physical document that proves your ownership of a certain number of shares in a company. It usually contains information such as the name of the shareholder, the number of shares, the date of purchase, an identification number, a corporate seal, and signatures.

Stock certificates were the standard way of representing ownership in the past, when trading was done manually and paper-based. Investors would receive a stock certificate when they bought shares and would have to present it when they wanted to sell them. They would also receive dividends by endorsing the receipt on the back of the certificate.

However, with the advancement of technology and the increase of trading volume, stock certificates became obsolete and impractical. Today, most securities are recorded electronically using a process called book-entry form. This means that there is no physical transfer of certificates when securities are exchanged; rather, accounting entries are changed in the books of the brokers or the depositories where investors hold their accounts. This offers the benefits of convenience, security, and efficiency.

What are full-service brokers?

A full-service broker is a broker that provides a comprehensive range of services to its clients, such as investment advice, research, portfolio management, tax planning, and alternative investments. A full-service broker typically has a personal relationship with its clients and offers a customized approach to investing.

A full-service broker charges higher fees than a discount broker, usually based on a percentage of the assets under management. For example, a full-service broker may charge 1% to 2% of the value of your portfolio per year. Additionally, a full-service broker may require a minimum amount of assets to open an account, such as $100,000 or more.

A full-service broker may be suitable for you if you:

  • Prefer to delegate the responsibility of managing your investments to a professional
  • Value the guidance and expertise of a qualified advisor
  • Have a large and complex portfolio that requires more attention and diversification
  • Are willing to pay higher fees for a higher level of service

Some examples of full-service brokers are Merrill Lynch, Morgan Stanley, and Edward Jones.

What are discount brokers?

A discount broker is a broker that provides a low-cost and self-directed way of investing. A discount broker offers you the tools and platforms to execute your own trades, but does not provide any advice or guidance. You are responsible for making your own investment decisions and managing your own portfolio.

A discount broker charges lower fees than a full-service broker, usually based on a flat rate per trade or a subscription model. For example, a discount broker may charge $5 to $10 per trade or $0 to $20 per month. Additionally, a discount broker may not have any minimum requirements to open an account, or have very low ones, such as $0 or $500.

A discount broker may be suitable for you if you:

  • Prefer to have more control and involvement in your investments
  • Have the knowledge and confidence to make your own investment choices
  • Have a simple and straightforward portfolio that does not require much diversification
  • Are looking to save money on fees and commissions

Some examples of discount brokers are E*TRADE, TD Ameritrade, and Robinhood.

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