Differences Between Full-Service and Discount Brokerages

What is "The Market"?

"The market is up" or "The market is down" are the most popular phrases in the world of Finance. These expressions refer to the financial markets, where buyers and sellers are brought together to trade financial securities (bonds and stocks). Financial markets are composed of money markets and capital markets. Money markets are for short-term bonds, while long-term bonds and stocks are traded on capital markets. Armed with accurate information about the price and volume of past transactions, as well as current demand and supply of financial securities, investors can trade rapidly at a price reflecting the actual market condition.

How securities are traded?

As a new buyer or seller it is very likely to be unaware of what a fair price is for your security. Therefore, people prefer to buy and sell securities through a brokerage firm, where a security specialist, called an investment advisor, assists you in your new endeavor. The investment advisor is accountable for preparing a financial plan according to investor's needs and goals. Therefore, the advisor is subject to a fiduciary duty to operate in client's best interest. Once your financial plan is set up, a licensed broker executes your trades.

Full Service Brokerage Firms versus Discount Brokerage Firms

A brokerage house is a business licensed to trade financial instruments for investors. There are two types of brokerage firms: Full service brokerage firms and Discount brokerage firms. You have probably heard of Morgan Stanley, UBS, and Goldman Sachs. These are the largest best-known full service brokerage firms in the world that spend enormous amount of money to advertise their names and rent posh downtown office space to impress their clients. These brokerage houses are very expensive, high- commissioned, and misleading. Most of them are divided into three divisions: investment banking, research, and retail. The investment banking division is responsible for initial public offering (IPO) of stocks as well as secondary offerings. The brokerage house generates profit from the stocks they sell to the public.

Therefore, they keep tight relationships with their public companies and try to promote them regardless of whether the investors make or lose money. The research division of a full service brokerage firm analyzes and writes evaluations and reports on publicly traded companies. This information is provided to you- the investor in order to help you make your investment decisions. Remember that the brokerage firm maintains solid relationships with the companies and none of these companies would be happy if investors sell their stocks. The retail division is made up of brokers, who exercise the trades. They charge you huge commissions for all the research the company does on your behalf.

Unlike full service brokerage firms, discount firms offer much lower priced services. They do not conduct IPOs and second offerings. All they do is just to place your trades for which they charge low commissions. Most discount brokers offer research in the form of company reports, charting tools, and newsletters. Based on these helpful materials you make your own decisions and the broker carries out your orders. Nowadays, discount brokerage firms are very popular. Most investors are familiar with names like: Charles Schwab, Fidelity, and E*Trade.

Allen is a freelance writer in the financial services and an occasional contributor to Investing Daily. Research for this article was based on Investing Daily's Stock Market Investing article archive. For more information on MLP investing, check out the latest free report on Understanding the Stock Market.

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