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.
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.