An execution only stockbroker such as discount broker offers to only execute your orders at the market but without giving you an advice to buy or sell a specific stock. He buys and sells shares on the instructions of clients but who offers no advice about what to buy and sell. Self-directed investors who want to make their own decisions are most suited to this service, and will probably be attracted by the lower dealing costs. So you as an investor take all responsibility for investment decisions. You give the instructions to buy or sell a stock by telephone or online, on a stock brokerage website or by using their software. So discount brokers:
- Do business over the phone or on the Internet by using their web site or software
- Because of low overheads, such as support a research department or spending time with their clients, they can charge lower commissions.
- You will pay less than if you trade with a full service broker.
- Discount brokers also offer no-load mutual funds with no transaction fee.
- Deep discount brokers charge a minimum commission of at least $5 up to $15
It is important to make sure that you know all the charges upfront. Execution only brokers may also require a minimum level of activity for an account or they charge a minimum fee (inactivity fee). So it is important to now how many trades you will make a month or a year, and choose a broker based on that.
WHAT DO I NEED TO DO BEFORE I CAN BUY SOME STOCKS:
To be able to buy/sell stocks, you have to choose a brokerage and sign up with them. You have to decide what is the best brokerage to use for trading. Sometimes it is one with lowest commission, but sometimes there are other important factors such as: interest paid on unused balance of your money in your brokerage account, interest charged for used margin in trading, maintenance inactivity fees, friendly using trading platform, trading platform monthly fee, wire transfer in/out if you live outside of US etc.
Before you can start trading, you have to fund it first! To fund the trading account, most executing only (discount) brokerages allow funding via cheque, account transfer and bill payment from any online banking account or by wire transfer. After the account is open and funded, you will get a username and password to log in in to the trading platform or on a web site, and you will be able to buy or sell stocks in the supported markets.
HOW TO OPEN A BROKERAGE ACCOUNT
Opening a brokerage account is very similar to opening a bank account with some additional information required. There is also likely to be a minimum investment required which could be as low as $500 or $1,000 for cash account and $2,000 for a margin account. So you have several types of accounts to choose when opening an account:
WHAT DO I NEED TO DO BEFORE I CAN BUY SOME STOCKS:
To be able to buy/sell stocks, you have to choose a brokerage and sign up with them. You have to decide what is the best brokerage to use for trading. Sometimes it is one with lowest commission, but sometimes there are other important factors such as: interest paid on unused balance of your money in your brokerage account, interest charged for used margin in trading, maintenance inactivity fees, friendly using trading platform, trading platform monthly fee, wire transfer in/out if you live outside of US etc.
Before you can start trading, you have to fund it first! To fund the trading account, most executing only (discount) brokerages allow funding via cheque, account transfer and bill payment from any online banking account or by wire transfer. After the account is open and funded, you will get a username and password to log in in to the trading platform or on a web site, and you will be able to buy or sell stocks in the supported markets.
HOW TO OPEN A BROKERAGE ACCOUNT
Opening a brokerage account is very similar to opening a bank account with some additional information required. There is also likely to be a minimum investment required which could be as low as $500 or $1,000 for cash account and $2,000 for a margin account. So you have several types of accounts to choose when opening an account:
- Single Account: Only one individual person is allowed to trade.
- Joint Account: Two individual persons can trade
- Cash Account: When you buy a stock (or ETFs) you have to pay 100% within a three days. This is the most common type of all accounts. If you don’t have the cash, you can buy the stocks.
- Margin Account: Using this type of account you can borrow money from your brokerage account to purchase a security, for which they charge interest. You have to put up a minimum of 50% or more, with a $2,000 minimum to open an account. Rules for margin accounts are set by FINRA (http://www.finra.org/index.htm). If the price of a security declines by a certain amount, generally by 30%, then the broker will ask you to come up with the cash immediately by selling other securities to make up the amount or cash.
Margin accounts can be very dangerous, especially in a declining or volatile market. For example, SP500 index is the most secure instrument of all stocks, and has the lowest volatility compared to individual stocks which is also known as the "beta". If you bought it in October 2007, before crisis began, your highest loss at any moment would be at 02 Mart 2009 when SP500 fall from 1562 in October 2007 to 756. Percentage loss in index was around 53%! So, if you have used all margin available in your account, you would got a margin call, and all your positions would be sold. On the other hand, if you bought right stocks, and they had an advance in price of 50%, your profits would be 100% on your original investment because of your leverage. It all depends how leveraged is used.
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