Don't go broke with a broker

Lyssa Beyer

Back in the day the only way to purchase stock was through a broker. An individual was required to purchase in allotments called blocks (100 shares). As the Internet became more popular and the economy was in a tech bubble, online brokerages became the new casino for day traders. Competition increased and fees decreased. Today, it takes very little money to open a brokerage account, and instead of fees, individuals can find bonuses to purchase shares.

Full-service brokerages: The bread and butter of the old investor. Firms have analysts and advisers to inform investors of the latest news and provide investment advice. This is where the saying, ‘When E.F. Hutton speaks, people listen,’ derived from. Full-service brokerages are also the most expensive firm to use. They make money from commissions, whether you do or not.

Discount Brokerages: This is like self-service at a gas station. Individuals can use some tools offered by a brokerage with some or no advice. All decisions are your own, so you save on commissions. Starting fees average $20 and up per transaction.

Online Brokerages: This is where day traders flock. These brokerages offer no advice and few offer free tools. Transaction costs can range from pennies up to $10 a transaction. The average day trader will make between 500 to 1000 transactions a day. Occasionally I will day trade, but generally I don’t exceed 100 transactions in a day. However, I prefer to invest instead of day trade. The good: Individuals can save a lot in commissions by relying on online brokerages. Some online brokerages will offer bonuses to open an account that basically equates to free money to play with. Shares can be purchased in any amount, including a fraction of a share. The amount of money required to open an account can range from $0 to $2000.

The bad: The cheaper the cost to open an account, the less service an individual will receive. Brokers make their money from commissions and will not always advise a client on the best investment overall, just the best at the moment. In the late ’90s the two hottest stocks were the “Triple Q’s” and Lucent Technologies.

The ugly: About 95 percent of day traders fail, and one of the requirements to even have the privilege to day trade is to have a minimum liquid balance of $25,000 cash daily. The Triple Q’s and Lucent? They imploded and are now valued at a fraction of what they used to be worth.

Also beware of the minimum requirements. Some brokerages may charge a fee or require a number of active trades, or need a set amount of money. However, not all brokerages charge an inactivity fee or have a minimum requirement.

Do you need a broker? No. There are many companies (including mutual funds and government bonds) that offer the investor the ability to purchase directly without a broker.Just contact the company. However, some may have restrictions that can be limiting at times but may also offer a discount to the market price.

Jason Windsor is a senior economics major and columnist for The Spectator. This column appears bimonthly.