Stocks are bought and sold through stock markets such as the New York Stock Exchange and Nasdaq. For the average person to buy stocks through these exchanges, you need a middleman to execute the trade. This middleman is called a stockbroker.
Nowadays individual investors will carry out trades online via a discount brokerage firm, such as Charles Shwab or Fidelity in the U.S. and Commsec, or CMC Markets in Australia. Human brokers still exist but they generally handle trades for larger institutional investors.
Stockbrokers are experts in markets and can offer advice on the best times to buy and sell. In exchange for executing the trade and offering advice, a stockbroker gets a commission in the form of a fee or percentage of the transaction.
Types of Stockbrokers
There are two main types of stockbrokers.
1. Full-Service Brokers
Full-service brokers offer the highest level of service. They usually send you detailed research reports on specific companies. Their service should include up-to-date research on specific companies and industries, as well as recommendations on portfolio construction and monitoring your portfolio.
A good full-service broker will contact you if something significant has changed in one of the companies in your portfolio or if a special opportunity arises.
The service these brokers provide comes at a cost and you will pay a premium for the full treatment.
2. Discount / Online Brokers
Discount brokers or online brokers offer a cheaper service without all the bells and whistles. Some simply execute transactions for a set fee or percentage and do not advise you on shares at all, others may provide a newsletter, but probably nothing of detail.
Online brokers are the cheapest to use. If you have access to your own sources of information and all you want to do is put through trades, then using an online broker may be for you.
Discount brokerage companies allow you to trade stocks usually for less than $10 per trade. Many online brokers even charge no commission to buy or sell stocks and other investments.
Because of discount brokers, nearly anybody can afford to invest in the stock market.
It used to be far more expensive to get access to the stock market and was limited to wealthy investors. These investors would typically work with a full-service broker and pay hundreds of dollars for executing a trade. The rise of the internet paved the way for discount brokers to provide faster and cheaper ways to invest in the stock market. This has opened the world of the investor to far more people with smaller accounts.
Need help choosing an online broker? Read 6 Steps to Choosing a Stockbroker