Mar 31st, 2008
Working Backwards: What’s a Broker?
A broker is an agent that executes buy or sell orders on stocks, bonds, or funds submitted by an investor. Up until the last twenty years, brokers were quite expensive and difficult to access. While lower cost brokers (also known as “discount brokers”) were available before Internet access became commonplace, the Internet has truly resulted in low cost brokers.
A “full service broker” is a broker that provides not just the ability to buy and sell investments but will also offer advice, research, tax planning, and other financial planning services. This type of service also comes at a price which can be considerably higher than the competitor of the full service broker: the discount broker.
A “discount broker” is a broker who handles buy or sell orders at a reduced commission; in addition, the discount broker is unlikely to offer any other services as provided by the full service broker.
With an emphasis on low cost, the discount broker is heavily in favor at this time on financial blogs like this one. However, the use of a discount broker places the responsibility for planning and research squarely on the shoulders of the investor–which is exactly where I want it. The low cost of discount brokers may also encourage frequent trading, which is typically detrimental to the health of your portfolio.
Almost all of the brokers you hear about on the Internet are discount brokers: Scottrade, Firstrade, Sharebuilder, E*Trade, AmeriTrade, and dozens of others. I personally have a couple of accounts at Firstrade and one at Sharebuilder.
Your alternatives to brokers of either type include directly purchasing stock from the company that issues it (or bonds from the government) or using a large mutual fund family and investing strictly in their funds. However, discount brokers have gotten so cheap and so good with the advent of the Internet that there’s not much of a reason to get an alternative unless you have specific needs. In any case, now you know what a broker, a discount broker, and a full service broker are; go ahead and use that knowledge in the best way you can!
