Forex Investment and Currency Trading

You buy stocks through a brokerage firm. A brokerage firm is a business licensed by the government to trade securities for investors. Brokerage firms join different stock exchanges and abide by their rules as well as the rules laid down by the Securities and Exchange Commission, or SEC.

Three Types of Brokerage Firms

There are full-service brokerage firms, discount brokerage firms, and deep discount brokerage firms. Here’s a description of each:

Full-Service Brokerage Firms

These are the largest, best-known brokerage firms in the country who spend millions of dollars a year advertising their names. Regardless of their advertising slogans, the two words that should immediately come to mind when you hear the names of full service brokerage firms are expensive and misleading. Other than that, they’re great. Most full-service brokerage firms are divided into an investment banking division, a research division, and a retail division.

The research division of a full-service brokerage firm analyzes and writes evaluation, fact sheets, and periodic reports on publicly traded companies. Supposedly this information is provided to you, an individual investor, to help you make educated decision. However brokerage firm makes its money by maintaining solid relationships with companies. There are millions of investors, but only a few thousand companies. Whom do you think the broker wants to keep happy? The companies, of course. So, you’ll rarely see a recommendation to “sell” a stock. Instead a broker will recommend that you “hold” it. No company wants to see a firm telling investors to sell its stock. The brokerage’s solution is to just never issue that ugly word.

The retail division is what you and I deal with. It’s comprised of brokers, who are really just sales reps, who call their clients and urge them to trade certain stocks.

Discount Brokerage Firms

Discount brokerage firms do not conduct initial public offerings or secondary offerings. Most don’t have in-house research divisions, either. They just handle your buy and sell orders and charge a low commission to do so. The commissions are discounted because the firms don’t shoulder the expense of a full-service research department and a legion of sales reps in a retail sales department.

Some discount brokers offer limited research assistance in the form of company reports, price quotes, news summaries, and other helpful material. But hey don’t have anybody call you to urge a buy or sell. The decisions are your decisions and the discount brokerage firm simply carries out your orders. Because they don’t maintain investment banking relationships with companies and because they make the same commission off any stock you trade, discount brokers don’t have an interest in selling you the stock of any specific company.

To further cut costs, many discount brokers offer Internet and telephone trading. That means you have the option of not talking to a representative in person. Instead you’ll use a website or touch-tone telephone to place your trade. Usually the discount broker will shave an additional percentage off the commission of such automated orders.

Discount brokers are gaining in popularity and you’ve probably heard of a couple. Charles Schwab and Fidelity are discount brokerage firms.

Deep Discount Brokerage Firms

As their name implies, deep discount brokerage firms charge even lower commissions than those charged by discount brokers. Deep discounters exist only for the purpose of carrying out stock trades. Investors don’t get much research assistance. Deep discounters are ideal for investors who conduct their own research and merely need a broker to place their trades.

As with discount brokers, deep discounters offer Internet and telephone trading. E-Trade, Scottrade, and TD Ameritrade are all deep discount brokerage firms.