Category: 

What Is a Brokerage Firm?

Article Details
  • Written By: Victoria Blackburn
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 July 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
The World Health Organization classified air pollution as more dangerous to health than smoking.   more...

July 25 ,  1978 :  The world's first in-vitro fertilization baby was born.  more...

A brokerage firm acts as the legal mediator between a buyer and a seller of financial products. Brokerage firms are usually associated with finance houses, although the terminology has been borrowed by the real estate and insurance industries as well. All investment trades must be made through a brokerage firm because individuals cannot interact directly with the stock exchange.

There are two main types of brokerage firms, traditional brokerage and discount brokerage. Traditional brokerage firms offer a hands-on approach to investment advice guiding clients with expert and in-depth knowledge on the products available. Their agreements often act as a legal power of attorney to conduct trades on behalf of clients as long as they are in-keeping with a previously determined strategy. The associated fees are notoriously high, but proportionate to the extensive services provided.

A traditional brokerage firm usually undertakes more than simply carrying out a stock or bond trade. The staff of a this type of brokerage firm is entrusted with the responsibility of researching the markets to provide appropriate recommendations and in so doing they direct the actions of pension fund managers and portfolio managers alike. These firms also offer margin loans for certain approved clients to purchase investments on credit, subject to agreed terms and conditions. Traditional brokerage firms have also become a source of up-to-date stock prices and quotes.

Ad

Discount brokerage firms got their name because they charge discounted fees. They offer a scaled down version of the traditional brokerage firms, so they commonly do not maintain research departments. Instead, they mainly handle the administrative work associated with the trades. Discount brokers were the first to offer online access to clients so they could perform trades for themselves, and also charge lower per transaction fees to perform trades at the client’s request.

One of the advantages of using a traditional brokerage firm is the value of the well-researched and informed opinions of the investment advisory staff. Countless investment decisions are executed on the word of those who work behind the scenes to crunch the numbers and interpret the facts surrounding various investment vehicles. Discount brokerage firms have found a place in the industry and are used mostly by investors who enjoy having full control of their investment decisions or are more cost conscious.

Ad

Discuss this Article

oasis11
Post 3

Sneakers41-You know a lot of banks now offer an institutional brokerage firm in order to provide investment services to its clients so that the bank can be the one stop shopping for all financial needs.

For example, Bank of America offers its customers the opportunity to invest with its Merrill Edge representatives. These are licensed representatives that represent Merrill Lynch.

When you go to a Bank of America branch, you just have to tell the lobby leader that you are interested in information and they will either take your name and number and have a representative from Merrill Lynch call you or they will give you information for you to call them yourself.

They offer self managed accounts if you are looking to invest less than $25,000 and they have actively managed accounts through Merrill Lynch if you have at least $25,000 to invest.

sneakers41
Post 2

Crispety-That is a great site when you are looking to invest in mutual funds, but if you want to buy municipal bonds you have to go to service brokerage firm that specializes in bonds like a Cantor Fitzgerald.

Also, many banks also have licensed people that are able to sell you securities like this. They can also educate you on the process because buying municipal bonds is really different than buying a stock.

You are essentially agreeing to let a local or state government borrow money for a set interest rate from you.

In return you will earn tax free interest payments twice a year. It is really important to invest only in general obligation bonds and not revenue bonds because those can be risky.

You also have to consider the actual state that you are investing in. For example, a state like California or New York might be too risky for the average investor and you might be better off investing in a state like Texas that seems to be more financially stable than most other states.

These are things that the brokerage firm can go over with you which is really important that you feel comfortable because you should never invest in something that you don’t understand because you will lose money.

Crispety
Post 1

It is good to do a brokerage firm comparison. You should really look at the brokerage firms list and see which are the best online brokerage firms.

A good way to start is to look at a brokerage firm that does not charge high fees.

These would be considered discount brokerage firms. Firms like Vanguard, Fidelity, and T Rowe Price fall in this category. They usually offer a wide variety of no load mutual funds that do not charge you a commission upfront like they do in the A shares funds, or on the backend for a period of seven years like they do in the B shares mutual funds.

There is some debate as to which mutual funds are best. But I do know that if you limit your expenses on a fund you will usually get a better rate of return because you do not have to make up for the commissions.

Some great mutual funds that offer very low fees are the index funds. These funds are not actively managed like a traditional mutual fund would be but it is very diversified in the sector.

For example, if you are looking for a fund that invests in the entire US stock market you might consider a fund like the Vanguard Total Stock Market Index.

These funds tend to bring a average to above average rate of return and will never be at the top of the best funds to buy, but their expense ratio is less than a quarter of a percent which really cannot be beat.

It is a good idea to research funds with a site called Morningstar as well as asking for a fund prospectus directly from the fund company before you actually invest in the fund.

This gives you all of the details pertaining to the fund like the fees, the management, and the holdings that it invest in so you can make a more educated choice.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email