When people think of buying shares, they concentrate very much on stock picking and rarely give much thought to the type of brokerage account they open. However because of the fees charged, the type of brokerage you choose can mean the difference between making healthy profits and making losses.
First of all ask yourself whether you need advice or whether you want an execution-only account. Brokerages that offer advice on what type of share to buy are expensive (good quality advice is not cheap). These fees can be so great that they cancel out any gains you might make from the share advice. Execution-only accounts on the other hand just deal with the administrative side of things – they take your order to buy or sell a stock and execute it, dealing on your behalf on the stock exchange, ensuring they collect the money from you (or disburse it to you when you sell a share) and dealing with all the paperwork associated with share ownership. Execution-only stockbrokers are cheaper than brokerages that provide advice.
Next decide whether you want an online broker or a broker you can deal with on the phone. Online brokers are cheaper than the type of brokers who deal over the phone. Again this is down to overheads – with phone brokers you are dealing with a person, which adds to the costs. Many shareholders opt for brokerages that offer a phone service in addition to the online service, and you get charged according to which you use for your transaction. The value of such a system comes into play during emergencies – sometimes, for example during 9/11, the online services go down because of the surge in traffic to them. Being able to phone a broker to execute your deal in these circumstances can save you money.
You also need to decide whether you want a nominee account for your shares or whether you wish to hold the shares in certificate form in your own name. Nominee accounts are cheaper because there is less administrative work for the brokerage.
The final thing to consider when you choose a stockbroker, is how often you trade shares. If you buy and sell shares frequently, the transaction fee per trade becomes very important. It can add up to thousands over the course of a year. Therefore you might want to trade off realiability against low-cost on transaction fees. If you buy and sell infrequently, you can afford to be choosier about the brokerage putting service above the level of the fee.