Brokerage firms act as intermediaries between buyers and sellers of financial products. There are two types: traditional, which offers expert advice and research, and discount, which charges lower fees and primarily handles administrative work. Traditional firms offer well-researched opinions, while discount firms are used by cost-conscious or self-directed investors.
A brokerage company acts as a legal mediator between a buyer and a seller of financial products. Brokerage firms are generally associated with finance houses, although the terminology has also been borrowed from the real estate and insurance industries. All investment transactions must be done through a brokerage firm because individuals cannot directly interact with the stock market.
There are two main types of brokerage firms, traditional brokerage and discount brokerage. Traditional brokerage firms offer a hands-on approach to investment advice that guides clients with in-depth, expert knowledge of the products available. Their agreements often act as a power of attorney to carry out transactions on behalf of clients, as long as they comply with a predetermined strategy. The associated fees are notoriously high, but commensurate with the extensive services provided.
A traditional brokerage firm typically does more than just complete a stock or bond transaction. The staff of such a brokerage firm have the responsibility of researching the markets to provide appropriate recommendations and, in doing so, directing the actions of pension fund managers and portfolio managers alike. These companies also offer margin loans to certain approved clients to purchase investments on credit, subject to agreed terms and conditions. Traditional brokerage firms have also become a source of up-to-date stock prices and quotes.
Discount brokerage firms got their name because they charge discounted rates. They offer a scaled-down version of traditional brokerage firms, so they typically don’t maintain research departments. Instead, they primarily handle the administrative work associated with the trades. Discount brokers were the first to offer online access to clients so they could make trades themselves, and also charge lower transaction fees to make trades at the client’s request.
One of the advantages of using a traditional brokerage firm is the value of well-researched and informed opinions from investment advisory staff. Countless investment decisions are executed on the word of those who work behind the scenes to crack the numbers and interpret the facts surrounding various investment vehicles. Discount brokerage firms have found a place in the industry and are used primarily by investors who enjoy being in full control of their investment decisions or are more cost conscious.
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