Types of Brokers

Brokers are generally divided into two large categories, Discount brokers and Full Service brokers.

Discount Brokers
Discount Brokers generally do not offer personal advice to individual investors; instead they make money by transacting business mostly online. Most Discount brokerages make money by doing business in volume, offering good customer service and low prices to drive more trades. The Discount Brokers usually offer a smaller number of products than full service brokers and keep their commissions lower to attract business. As an independent investor, I am a big fan of Discount Brokers. I have used TDAmeritrade and Etrade for many years and I am very pleased with their services. There are a number of other Discount Brokers like Scottrade and Sharebuilder as well, which are worth investigating before choosing a Discount Broker. Here is a link to a Broker Comparison Table at the Motley Fool website.

Full Service Brokers
Full Service Brokers usually offer a wide variety of services like Insurance, annuities, stocks, bonds and derivatives. They usually make money by either charging a percentage of assets managed or by taking a flat fee for the assets under management. The brokers who work for full service brokerages work mostly on commission and usually solicit their business. This usually means that it is in their interest to get their customers to trade. They make money whether or not the client makes money or not. I would like to mention that I have never used a full service broker myself and I am basing all the information above on my research. Large investment firms like Merrill Lynch and Smith Barney would qualify as full service brokers.

Since I believe in a do-it-yourself approach to investing and research, I recommend Discount Brokers. As I mentioned before, I have used a couple of discount brokers for the past few years and I am very happy with their level of service. With the explosion of the internet, discount brokers offer a lot more features than in the past, for instance TDAmeritrade offers free research from Standard and Poor’s stock report, which can be very helpful in making investment decisions.