There are two major categories of brokerages: full-service and discount.
Increasingly, banks offer investment services as well, so if transferring money from account to account isn’t your cup of tea, try asking about this at your local bank.
Choose your brokerage firm according to your style of investment. Ask yourself if you would feel better with an investment adviser and/or broker on the other end of the phone, or if you would feel just as confident with- out even talking to a person at all.
Full-Service Brokers
Full-service brokerages serve several purposes. First and foremost, they act as the go-between for buyers and sellers of stocks (this is the major pur- pose of any brokerage firm). Second, they act as a resource for individual investors. If you sign up with a full-service broker, don’t be surprised if some baboon gives you a call to tell you about hot stocks in which you should invest your bananas.
But be aware that these baboons are often like used-tree-house sales- people; they may have ulterior motives. Your stockbroker may be asking you to buy a stock, which his or her brokerage firm is trying to move “off the shelves.” This would occur when your brokerage firm has been involved in the public offering of a company, or has a large number of shares that it needs to get off of its hands. In fact, brokerage houses often pay their brokers bonuses to push stocks like these.
If you’ve signed up with a full-service broker, don’t start hooting and hollering just yet. The stocks your full-service broker will tell you about will not always be “good” or “bad,” nor will they usually be stocks the firm has asked them to move. But always keep in mind that one of our cardinal rules of investing is that a market monkey should choose stocks for him- or herself.
Discount Brokers
Discount brokers are divided into two subcategories: discount and deep discount. Discount and, to an even greater degree, deep discount brokers primarily facilitate the buying and selling of stocks. You will practically never have discount brokers call you and tell you about a stock. However, you may receive free materials, newsletters, or investment tools to help you make decisions on investments. Be aware that if you sign up with a dis- count broker, you will be in an extremely independent investment deci- sion-making environment.
The major difference between all three types of brokerages beyond service is price. Brokers make some money on commissions (a fee charged for the execution of a trade). When a stockbroker assists you in deciding what to buy or sell, there will normally be a larger commission fee than otherwise. Solicited trades (when a broker asks you to buy a stock) will also cost you more. If you don’t have a lot of cash in your account to start
with, try to get the lowest trading fees possible. Chimp Elliott’s advice is to stick with a discount broker and make your own trading decisions once you have learned the basics of trading and order placement.
SUMMARY
Can there be any advantage to trading with a major brokerage firm and get- ting their advice? Is this the right thing for you? Here are some considera- tions on both sides of the issue. Think about them and then decide for yourself.
• There is no hard and fast evidence that the advice of a major brokerage firm can help you make money. In fact, many brokerage firms have downright miserable records. The recent dot-com debacle is merely one example of how most brokerage houses recommended worthless stocks when they were high in price and then advised their clients to dump those stocks after they had lost a great deal of value.
• Even if you use a major firm you cannot expect to get perfect advice.
If you believe that the top brokers can help you make money then you’re likely to be disappointed.
• Most major brokerage firms recommend many stocks.You’ll still have to make the final decision as to which stocks you will buy or sell. And we know that most investors will choose wrong.
• Many brokerage firm recommendations only tell you what to buy and at what price.They rarely tell you how much to risk and when to get out if you’re wrong.
• Brokerage houses have a vested interest in recommending stocks since they make commissions when you trade. Be careful what you believe!
• Many brokerage houses have a conflict of interest. They are often the promoters or underwriters of the stocks they recommend.Although they disclose this and although it’s (usually) legal for them to pro- mote stocks, they are biased and, therefore, suspect.
• If you’re a favored client of a brokerage firm (by which we mean that you have big bucks in your account) you may be given tips before the rest of the investment world finds out about a recommendation.It’s not unusual for such investors to buy before the public knows the news and then to sell when the public is buying. If you think this doesn’t happen, then you’re living in a fool’s paradise. If you have a small account with a firm then you won’t be privy to such advance information.
• At times your brokerage firm may give you an opportunity to buy into an IPO that they are underwriting. You could make some money this way when the IPO market is active and stocks in general are trending higher. So this could be an advantage to you.
• Major firms often charge higher commissions.Do you want to pay higher commissions for services you can’t use?
• Some brokers can pressure you and persuade you to make some trades and not others.If you value your independence and are easily influenced, then consider not using a broker but rather trading online.
• At times the amount of information available through your broker could be overwhelming. Not all market monkeys can handle the input. Our small simian cerebrums can only handle so much input at one time.
• Large brokerage firms can often offer you a variety of integrated services that you may not be able to obtain from an online broker.
This is something you may want to consider.
• Some people can actually do better in their trading if they deal with a human being to take their orders.A broker can actually help you learn things about proper procedures, order placement, and so forth.
Now let’s get a little more advanced. Chapter 5 will give you a few tips and specific procedures for finding stocks that can make you money.
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