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How to Choose a Stockbroker

By Charles Hopkins Published 03/13/2006 | Finance

A stockbroker is a person who mediates buying and selling of stocks and shares. S/he is specifically trained to do this for investors in exchange for a fixed commission.

This commission, a percentage of the invested capital charged for the service, varies from broker to broker, or the firms they represent.

The stock market does not require buyers and sellers to assemble directly. Transactions are made mostly through these agents who charge a fee known as brokerage.

In general, the brokerage is determined at a flat rate per trade. But if you trade over a set limit, it may be charged as a percentage for example, 0.11% for all online trades over 30,000 in value.

In most cases of buying or selling shares, you must use a broker who holds an authorized of Financial Services License, or is an authorized representative of such a license holder. But you have to know what type of broker suits your need. How do you locate the person and exactly what services shall you need as a share market investor?

You may need full-service or advisory brokers. These brokers ask for higher brokerage, because in addition to their normal handling services, they also make recommendations and give advice based on their own in-house research. They analyze your investment needs, help you to decide on short- and long-term goals, assess the risk tolerance youre prepared to take, and allocate your share portfolio accordingly.

Then there are discount brokers. These brokers do not offer advice or make recommendations. They only buy or sell the shares that you select. Their brokerage is expectedly lower than that of full-service brokers. You can buy or sell shares through a non-advisory broker online or by phone.

An advisory broker is of a great help if you're just starting out or have hardly any knowledge or time to research on investment possibilities. Some brokers do not charge for advice explicitly, but you can be sure that the fee is included in the higher brokerage they get from you each time you buy or sell shares.

Fees also vary according to the service you want. If you go for high-end services like ongoing portfolio management, youll likely be charged ongoing management fees. If you only have small money to invest, it may be difficult to find a full-service broker accepting you as client.

You can find a broker to buy or sell shares by phone or online. For full service broker you have to move beyond the phone and go through an elaborate contract. Both full-service and online discount brokers can offer you a range of online tools charting portfolio management, and access to live market data.

It is best to take a rational position in choosing a broker. Compare the benefits and costs associated with different brokers and go for the one who generates maximum expected net benefit based on plausible turns of events over a relatively longer period of time.

Read a brokers Financial Services Guide (FSG) before your first meeting. Services offered can vary widely. Most online brokers offer shares, options and warrant trading but many of them dont trade futures, margins or international shares. Work out what services you really need. Do not pay for a service that you never want like trading international shares.

Choose a broker who offers automatically updated data known as real-time/dynamic market data, or at least instant (but not automatically updated) data known as live data. Some only offer 20-minute delayed updates.

Some discount brokers will charge a fee to access extra services like interactive charting or independent research. Work out the maximum expected net benefit for exactly the services you need. This is the best way to choose your broker.