OK, so you've taken the plunge and after setting yourself some investment goals and analysed your risk appetite and you've decided that you want to invest in shares. What now? Your next step is to find yourself a stock broker. A brokerage firm is a business licensed by ASIC to trade in securities on your behalf. There are 2 main types of brokerage firms, full service brokerage firms and discount brokerage firms. Deciding which brokerage firm to use will depend on your trading style.
Full-Service Brokerage Firms
Examples of full service brokerage firms in Australia include ABN AMRO Morgans & Bell Potter Securities Limited, in addition to some American brokers Morgan Stanley, Goldman Saches & Merrill Lynch. As the name "full service" suggest, full service brokers are there to attend to all your needs. This service can include advice on share selections and portfolio constructions, managing your account, providing investment materials, new investment opportunities - the works. This 'full service' however, comes at a cost, full service brokers can be very expensive compared to online discount brokers.
Another difference between full and discount brokers is that full service brokers earn their living off your commission on each trade. The more you trade, the more they make. You can see how this may encourage churning, the practice of excessive buying & selling of securities by your broker for the purpose of generating commissions without any regards to your investment objectives. It is no wonder then, that the first thing that comes to mind when we mention full service brokers is expensive and misleading.
Full service brokers are more suited to investors who have large sum of money. For example, it really makes no sense investing $2000 via a full service broker when the brokerage fee is $100 (5% of investment). In any case, it may be difficult to find a full service broker that will accept you as a client with only $2,000.
Discount Brokerage Firms (Online Brokers)
Discount brokerage firms or online brokers are popular amongst investors, especially day traders, because unlike full service brokers they charge a lot less. They can offer their services at such low prices because they don't provide investment advice, they are basically there to execute your trade, whether that is to buy, sell or short. Other than their lower cost, the benefits of online discount brokers include faster response time, and the ability to trade virtually when you want, as long as there are bids. This is because discount brokers or online brokers have their systems set up via the internet, therefore all you need to do is log in and make your trades.
While discount brokers don't have personnel with expensive suits at your disposal they do offer a tonne of research material in the forms of charts, quotes, company reports, alerts, watch lists, summaries and other helpful materials. Competition between online brokers is high, with the largest player being Commsec and Etrade. Other than the standard buy and sell orders, Commsec also allows conditional trading & triggers, short selling, SMS alerts, derivative trading (options), CFDs and International shares. It is important to make sure your discount broker offers you real time/dynamic data (automatically refreshes the share price) or live data, you don't want to be staring at a share price that is delayed by 20 minutes.
Online discount brokers are preferred by those who are after a quick and reliable service rather than paying for full-service broker services that they may not even need.