Choosing Investment Brokers Tips
Read these 5 Choosing Investment Brokers Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Investing tips and hundreds of other topics.
Six important things to consider
You have studied and read about the options basics. You are excited about the potential for big profits in the options market, you understand the risks involved, and you would like to start your own options trading program. So what's the next step?
If you have not done so already, you must establish an equity options account with a brokerage firm. The following are some important factors to consider when choosing an options broker:
Options Expertise. Does the firm have brokers available who specialize in options (preferably Registered Options Principals (ROPS), who must pass the Series 4 test to show their options knowledge) to handle your orders and answer questions?
Account and Margin Requirements. What is the minimum account size for options trading at the firm, and what margin requirements does it demand?
Commissions and Fees. What are the firm's commissions for options trading and its fees for maintaining an account or using other services?
Service. What kind of personal service and attention will you get with your account, and what kind do you need?
Automated and Electronic Services. Does the firm offer touchtone trading or Internet/PC trading?
Features. Can you access quotes cost-free from the firm's computer for options positions you either hold or are analyzing? Does the firm offer electronic trading and written confirmations on each trade? Does the firm offer such account features as check writing, bank wires, and monthly statements?
Reputation. Does the firm have an established reputation for executing trades promptly and going the extra mile for its customers?
You should begin the process of selecting a brokerage firm for your options trading by gathering information on several firms and consulting with colleagues, friends, and relatives for referrals. Before you make your decision, weigh your various needs and resources to see what type of broker would best fit your situation. For example, a very experienced options trader looking for low commissions, minimum margin requirements, and the ability to trade via phone, or computer may choose to establish an account with a no-frills, deep discount broker. On the other hand, an investor relatively new to options trading who prefers personal service may decide to go with a full-service broker who is knowledgeable in options, can take orders over the phone, and has a walk-in office. Your personal situation will determine the most appropriate type of broker for you.
Full Service Brokers
Full service brokers seek to offer just that: full service. If you establish an account with a full-service broker, you will be assigned an individual broker who will personally handle your account. The minimum account requirements and commissions of full-service brokers are generally higher than those for discount or deep-discount firms, and they often specialize in higher net worth clients. You may be able to negotiate lower commission rates with a full-service broker based on your account size and your frequency of trading. The payscale of brokers at full-service firms is usually based largely on commissions generated. This has the potential to create a conflict of interest between the broker's need for commission income and your need for winning trades, which heightens the importance of recommendations from satisfied clients. The full-service firm may offer a wide variety of services and abilities that are not available at other firms, such as personal investment advice, an increased opportunity to buy Initial Public Offerings (IPOs), a fully staffed bond desk, and an in-house investment research department.
Options-specialized brokers
Options-specialized brokers have grown in recent years by filling a niche that was long neglected by full-service firms and by many discounters-serving the special needs of options traders. These firms generally employ ROPs to interact with clients and will often handle difficult or complex option orders or transactions that less specialized firms tend to avoid. Although not all options-specialized brokers offer deep commission discounts, most offer very attractive commission rates.
Deep-discount brokers
Deep-discount brokers arose from the discount broker camp as the gap between the discount firms and full-service brokers narrowed. Basically, deep discounters offer the lowest commission rates along with stripped-down service. These firms are geared to knowledgeable investors who need little hand-holding. Because many options traders are in this category, the options market share of the deep discounters has been growing steadily. Personalized attention at a deep discounter may be virtually nonexistent, as may be additional features such as twenty-four-hour customer service, bond trading, or foreign stock investing.
Discount Brokers
Discount brokers came into existence in 1975 when the New York and American Stock Exchanges agreed to abandon the minimum commission schedule previously imposed on all members. These new, less-binding regulations encouraged the emergence of discount brokerage firms that charged lower commissions in return for less personalized service. Discount brokerage houses vary widely, but almost always have cheaper fees and commissions than full-service houses. Personal attention and specific investment advice are generally not part of the picture, but the discount broker usually offers convenient access to trading and customer services through a toll-free telephone number. Brokers at discount firms are often paid relatively more in salary and relatively less in commissions than their full-service counterparts, giving them less incentive to induce you to trade. On the other hand, the lack of sales incentive may make your dealings with a discount firm more impersonal, and often you will not deal with the same individual on a regular basis. Note that the gap in the degree of service between full-service and discount firms has narrowed considerably over the past decade, as has the gap in commission rates.
| Guru Spotlight |
| Kristle Jones |
