Stockbrokers: Full Service Or Online Stock Broker: Which One Do You Need?

The story of how CFD brokers emerged have been an interesting one.

Some people say that those that use a full service broker don't know what they're doing! So they pay through the nose for them for advice - and that the advice is based not on what they really think is going to go up...and is random at best. This is not my opinion. More on this in a moment...

And it all started with the traditional stockbroker, then evolving into the online stock broker.

Let’s have a look at these types of brokers and the differences between them, before looking at the CFD market makers.

Do I need a full service stockbroker?

In the beginning when CFDs were not available, there was only share trading available with traditional full service brokers.

Their commissions were typically large especially if you wanted a full service broker to give you “advice” or do more complicated trades, rather than a stock broker just to place orders for you. You would call them up on the phone and they would place your order for you.

Do they call you back to advise you when to sell? Many do, many don’t.

Do they trade themselves and therefore understand risk management, trading strategy, stop losses? Many do, but many don’t.

So it depends on whether you want a stockbroker to give you advice, and what kind of advice. Check their areas of personal experience to see if they are what you need.

Also check their numbers of clients as if they have an excessive client load, they may not be able to get back to you as quickly or remember everything they’re supposed to look out for you if they need to remember to do something for you.

It is said that with many full service brokers that they advise you to buy or sell not based on what they think will go up, but based on 1. they make a commission (this is how they earn a living) so it really doesn't matter what stocks they advice you to buy or sell, 2. if they have a client who is selling off a large number of stocks, then they can get you to buy them to offload the excess, or 3. if they have underwritten stocks during a float and they have excess stock that has not been bought, then they need to get rid of these, hence their advice.

This is why it's good to know the expertise of your full service broker so that you know their skills and agenda (if any). Who knows? Maybe they are great at fundamental and/or technical analysis and have a great trading system?

Do I need an "execution only" broker or an online stock broker?

With these types of brokers, commissions and brokerages are a lot lower, as traders use these brokers to place their trades but are not paying for advice.

With the online share brokers, trades are done online via their trading platforms. In many cases the trading platform is free, although in Australia, you have to typically pay a monthly ASX fee to get ASX data.

So for those that wanted to trade a share trading system, their brokerages came down quite a lot with these discount stockbrokers, making trading a lot more profitable.

To overcome a fixed cost of say $75 or $100 one way for a broker with higher costs, is significant. You have to make a larger return on your trades to break even, and then to make a profit. But with an online share broker, a brokerage of say $25 one way, is easier to overcome.

So why would anyone need a full service broker you may ask?

Many traders now don’t use their brokers to provide “advice”, especially as more investment and trading educational seminars and training courses appeared. This grew in some countries more than others, as people realised one thing: they wanted to trade and they needed training.

Yes, some people can learn to be a competent trader on their own. But for most people, getting proper training meant that they could now develop their own trading system, and backtest their performance, or learn a good system that’s already traded by someone else.

In this case, they only needed a broker to place their trades, and so online stock brokers have taken off.

Choosing between stock brokerage firms therefore, depend on their:

Cost
Margin trading
Ease of use of their platforms
Speed of execution
Stability of the company
Times when the platform can be used (depends mainly on the stock exchange you’re trading with)

CFD Brokers

CFD market makers are another type of broker, and are usually an execution only online broker that provides a platform for placing CFD trades.

There are more emerging now as CFD trading has become more popular.

The difference between them and stock brokers is that some CFD providers give a market made price that mirror but may be slightly different to the underlying stock prices with a slightly widened spread, while some provide Direct Market Access CFDs which prices are the same as the underlying market.

Another difference is the larger number of shortable stocks, and of course the leverage available.

What to look for when choosing one includes:

Brokerage
Spread widening or underlying stock price
Slippage (usually know after you start trading)
Whether they provide Direct Market Access CFDs or market made CFDs
Margin Requirement
Numbers of long and short CFDs tradable
Whether stop entries are allowed
How stop losses are executed

So these are the main differences betwen brokers, and how they have "evolved" with time.