The Differences Between Buying Shares via a Broker and Online
When it comes to purchasing shares, it can be a matter of sometimes confusing terminology. Understanding the differences between buying shares via a broker and online is essential for investors wanting to make informed decisions. This article will explore the distinctions, focusing on cost, time efficiency, and the level of advice available.
Understanding Brokerage Terms
Most shares, with the notable exception of direct offerings from companies, are bought and sold through brokerage firms. These firms operate on various stock exchanges and require individuals to be licensed and regulated to buy and sell stocks to the public. Brokerage firms employ licensed individuals known as “brokers” to assist clients, but the term is technically “registered representatives.”
Discount vs. Full-Service Brokerages
Brokers can be categorized into two main types: discount brokers and full-service brokers. Discount brokers, such as Charles Schwab, Vanguard, and Scottrade, hire brokers on salary and generally do not offer personalized advice. Full-service brokers, like Merrill Lynch, Morgan Stanley, and UBS, employ brokers who may provide advice and management through commissions or fees. Most full-service brokers also offer online trading, but the primary advantage of discount brokers lies in their cost-effective nature.
Online Brokerage vs. Traditional Brokerage
When people refer to “online brokerage” or “online investing,” they typically mean discount brokers. This is due to the lower cost structure associated with these firms. Discount brokers charge slightly more than $4.95-$6.95 per trade, with some offering fee-free trading, such as Robinhood. Full-service brokers, however, often charge higher fees, typically around $50 or more per trade. Additionally, full-service brokers charge fees for management and advisory services.
Cost is a significant consideration when choosing between these two options. Online trading is more cost-effective, allowing investors to execute trades more frequently without incurring high fees. Discount brokers typically do not charge for trades executed online, whereas full-service brokers may charge higher transaction fees and other management costs. In contrast, full-service brokers may offer personalized advice and management, which can be beneficial for investors seeking investment guidance.
Time is another essential factor. Online brokers allow investors to place buy and sell orders instantly, usually within milliseconds. In contrast, working with a traditional broker involves a more hands-on process. Investors must call or visit the broker to execute the trade, which often leads to delays. For busy investors or those who prefer a hands-off approach, online trading offers convenience and speed.
Advice is a critical element that differentiates these two types of brokers. Online brokers provide a wealth of information and tools to help investors make informed decisions. This includes market data, analytical tools, and educational resources. Investors can use these resources to gain insights and make their own decisions, or they can seek advice from the broker's online platform.
Full-service brokers, on the other hand, can offer personalized advice and recommendations. Investors can consult with a broker to get their opinion on specific stocks or market trends. While this personalized advice may not always be more accurate, it can provide peace of mind and support for decision-making. Some investors find this level of service invaluable, especially those who are new to investing or those seeking a long-term investment strategy.
Choosing the Right Broker
Choosing between a discount broker and a full-service broker depends on individual preferences and needs. For those who prioritize cost and convenience, online trading through a discount broker is an excellent option. These brokers offer lower fees and the ability to trade quickly and easily online. For investors seeking personalized advice, management, and a more hands-on approach, full-service brokers provide the support and guidance needed for a comprehensive investment strategy.
Conclusion
Whether you choose to buy shares via a traditional broker or online, understanding the differences is crucial. Cost, time, and advice are all important factors to consider when making a decision. While online brokers offer cost-effectiveness and convenience, full-service brokers provide personalized advice and support. Both options have their benefits, and the choice ultimately depends on your personal investment goals and preferences.