What does a brokerage firm do? There are different kinds of brokerage services offered by different types of brokerage firms. The most common types of firms include full-service firms, discount firms, and online firms.
Full-Service
A full-service brokerage firm is the most costly type of brokerage firm due to the significant number of services they offer, buying and selling securities being the main one. Traditionally, these firms had to bring buyers and sellers together physically. Today, full-service brokers place orders over the internet, phone, or smartphone, making the investment process much quicker. In addition to buying and selling securities, full-service brokerage firms provide a variety of financial services, such as financial planning, trust services, wealth management services, tax consultation, and retirement planning services:
- Financial Planning: Brokerage firms help people plan their financial futures. It primarily relates to paying off debt, setting up savings plans, and helping clients make the most efficient use of their money.
- Trust Services: Brokers also assist clients in setting up trusts to put them in the most advantageous possible financial position.
- Wealth Management: Wealth management pertains to the firm managing an amount of money that a client invests with them. Brokerage firms take the money that clients entrust them with and invest that money in profitable assets. Investing strategies aim to profit across a variety of markets like the stock market, bond market, ETF market, money market, and derivatives market.
- Tax Consultation: Brokerage firms normally have tax specialists to assist clients with their tax needs. It generally relates to minimizing taxes or legally avoiding taxes altogether.
- Retirement Planning: Brokers help clients ultimately acquire the money they need to enjoy retirement, which is done via a savings and/or investment plan.
Discount
Discount brokerage firms do not provide financial consulting or planning services. These firms simply give access to online research services and facilitate online trading and over-the-phone trading. Discount brokers are cheaper than full-service firms in that they limit in-person services to save customers commission costs. The increasingly competitive brokerage industry has forced a lot of these brokers to drop their small-trade commission fees to zero to stay competitive. It has shaped the business model of discount firms in a way that sees them making money on larger trades rather than small exchanges.
Online
Online brokerage firms are very popular today. It is very convenient for investors to simply go on the internet and log in to their trading accounts on their phones or computers. Applications that enable smartphone trading for $0 per trade are common examples of online brokerage firms. There are two types of online brokerage firms: one that doesn't have any physical offices and one that operates under a full-service or discount firm. A lot of online brokers provide their customers with self-service accounts, which are accounts that customers operate on their own. Since the brokerage does not provide any significant services, these accounts are the cheapest option. There are a number of tradeoffs that investors should consider before investing with an online brokerage firm:
Advantages:
- Cost: It is very affordable to own an online brokerage account.
- Control: Since the customer solely manages the account, they have full control over investment decisions.
- Accessibility: An investor can simply access their investment account by logging into the broker's online platform to monitor their investments.
Disadvantages:
- Emotions: Since the investor acts independently, there is no experienced broker to mitigate the effects of the investor's irrational decisions.
- Knowledge: Investors with very limited knowledge of buying and selling securities can easily lose a large portion of their investment capital by making simple mistakes.
- Software: If an online brokerage site experiences even the slightest software malfunction, an investor can potentially lose all their money.
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Most brokerage firms today allow customers online access to their investments. It is critical to properly research a brokerage house that one might be interested in before investing. The decision of which type of brokerage house to choose largely depends on the services one needs access to. The investment cost is a key factor when choosing a broker. One might avoid brokers with high trading fees to maximize investment gains. The firm's reputation is also vital to consider. Is it reliable, and does it offer the necessary tools to invest as efficiently as possible? Investors should further consider the extent of control they want over their investments. Investors with little financial experience tend to give the firm full autonomy over their investment capital, whereas experienced investors often prefer to manage their funds.
Beyond financial trading, important decisions have to be made concerning other services like financial planning, trust formation, wealth management, tax consultation, and retirement planning. Decisions about these aspects usually come down to the brokerage house's reputation and the promotions it offers. A brokerage company known for offering its customers a large retirement fund will naturally be more attractive to people searching for financial planning.
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A brokerage company is an institution that provides financial services like trade facilitation and financial planning. Brokerage firms allow customers to buy and sell securities, which regular banks do not. There are three main types of brokerage firms: full-service firms, discount firms, and online firms. A full-service firm provides financial planning services, a discount firm offers limited in-person services, saving customers commission fees, and an online broker provides low-fee online services. An online platform where investors can conduct smartphone trading for $0 per trade is the best example of an online brokerage firm. When considering acquiring brokerage services, it is imperative to weigh factors like brokerage fees, account control, and the firm's reputation.
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Video Transcript
Brokerage Firms
Meet Eddie. He invests all his extra money in the stock market. It is his way of saving up for retirement. In order to invest in the stock market, he needs to use the services provided through a brokerage firm. Brokerage firms are financial institutions that help you buy and sell securities. They act as the middle man between the buyer and the seller. Depending on the brokerage firm type you choose, you can either make your buys and sales via telephone, internet, or smartphone. Brokerage firms generally charge per buy or sell order with assisted telephone orders being more expensive. Let's take a closer look at the types of brokerage firms and their services before learning which one Eddie chooses based on his needs and preferences.
Full-Service
A full-service brokerage firm is a brokerage firm that provides a range of financial services in addition to allowing you to buy and sell securities. These firms can provide customers with financial planning services as well as consulting services. They can also provide trust services and wealth management services. Of course, the level of service you receive is reflected in the commissions the brokerage firm will charge on your orders. This is the most expensive type of brokerage firm. Also with this type of brokerage firm, you will be able to place your buy and sell orders over the internet or over the phone. However, if it's over the phone, the brokerage firm may charge an extra service fee for the additional assistance. Some firms also offer access via smartphones.
Discount
A discount brokerage firm is a brokerage firm that traditionally doesn't provide any financial consulting or planning services. Today though, many of these discount brokerage firms also provide access to online research services you can read through yourself to make your decisions. The commissions charged by discount brokerage firms are cheaper than those of full-service brokerage firms. Like a full-service brokerage firm, you can make trade over the phone or online. Some also do offer trades via a smartphone.
Online
An online brokerage firm is a brokerage firm that provides its services through the internet. There are two types of online brokerage firms. There is the type that doesn't have any physical offices at all. And then there are those that operate under a full-service or discount firm. When the online service is provided as an option of a full-service or discount firm, it is referred to as a self-service account. This option is the cheapest. You have online access to your account no matter what time of day it is or what day of the week it is. You can place buy and sell orders over the internet any time you want. You can do as much research as you want and look at all the charts that you want, but you won't have access to financial consultants or any other live person from the brokerage firm. Some of these online firms sometimes even offer completely free buy and sell orders. Also, some of these online firms offer plans that operate on smartphones.
How to Choose
So, which of these three types of brokerage firms will Eddie choose? Eddie looks at the services that each offers and how these services are administered, and he decides to go with the online brokerage firm. Eddie is proficient in his use of the computer, and all of his devices are connected to the internet. He has the latest smartphone and he upgrades his phone every year, so he always has the latest in technology. Eddie also prefers to do his own research, so the online brokerage firm is the best choice, as it provides Eddie all the services he is looking for at a great price.
When it comes to choosing the right type for you, consider what services you need to have access to. If you need professional financial consulting, then a full-service brokerage firm will better suit your needs. But if you don't need any consulting and can do everything online, then an online brokerage firm will fit your needs.
Lesson Summary
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Brokerage firms are financial institutions that help you buy and sell securities. There are three types of brokerage firms that we looked at in this lesson.
A full-service brokerage firm is a brokerage firm that provides a range of financial services in addition to allowing you to buy and sell securities.
A discount brokerage firm is a brokerage firm that traditionally doesn't provide any financial consulting or planning services.
An online brokerage firm is a brokerage firm that provides its services through the internet.
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