In order to invest and trade Stocks an individual will require the services of a “Broker”.
A “Broker” is a Firm or individual that facilitates the Buying and Selling of Stocks on behalf of an Investor.
There are four broadly defined types of Brokers, which are distinguishable by their approach to managing an investment portfolio; these are as follows:
- Full-Service Brokerage Firms Employing a Stockbroker
- Self-Directed Investing
- Automated (Robo) Investing
- Direct Market Access Brokers (DMA)
The difference among the four “Broker” types referenced above apply to Fees, available Services, the focus of the Brokerage Service provided as it relates to the Buying and the Selling of Stocks, such as: Direct Access Brokers.
Successful Investing requires knowledge, time, commitment. The knowledge requirement can be complex pursuant to understanding and correctly interpreting Technical Analysis Indicators to achieve profitable investment decision-making.
For novice investors it may be more prudent to use a professional investment advisor or in the alternative, an automated investing option instead of undertaking a self-directed approach to managing an investment portfolio.
The advantages and disadvantages of adopting each of these three approaches to managing an investment portfolio will be examined hereafter.
Self-directed investing refers to managing your own investment portfolio.
Professional portfolio management refers to retaining and accredited investment professional to provide investment advice and to manage an investment portfolio on behalf of an investor.
Automated investing refers to a process of portfolio management where investment decisions and the management of an investment portfolio through an automated process of investment decision-making.
Full-Service Brokerage Firms
In the United States and Canada professional investment portfolio management is undertaken by a full-service brokerage firm whom employs a Stockbroker, whom is an individual that buys and sells stocks and other investments on behalf of an Investor in return for a fee, commission, or markup.
In the United States and Canada stock stockbrokers are regulated as a broker or broker-dealer and are required to hold a relevant license.
A Stockbroker generally acts as a financial advisor and investment manager; and in specific cases a Stockbroker in Canada and the United States may also be licensed as a financial adviser such as a registered investment adviser.
If you choose a full-service Broker to invest in Stocks and manage your Portfolio, once you open an account at a Brokerage Firm, a Stockbroker, also commonly referred to as an Account Representative, will be assigned to your Investment Account. Your Account Representee will meet with you to determine your Investment Goals and Risk Profile; afterwhich an investment Strategy will be proposed to you, which will consist of Stock recommendations to be bought for the Investment Portfolio. All you need to do is approve the purchase of the stock investments that are recommended by the Stock Broker for the Investment Portfolio.
Most full-service Brokerage Firms have Investment Websites that will allow you access to information, including Portfolio Performance data, Research Reports; and in many cases, you will be able to Buy and Sell Stocks on a Trading Platform for a Fee, if you choose to do so.
In the United States stockbrokers are primarily regulated by the FINRA FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINA), which is authorized by Congress and which is a not-for-profit self-regulatory organization that oversees and regulates U.S. broker-dealers.
Complaints about broker-dealers in the United States can be made to Fina, the SEC, and to a State Securities Regulator.
In Canada, Stock Brokers are primarily regulated by the Investment Industry Regulatory Organization of Canada (IIROC). IIROC is a national self-regulatory organization that oversees all investment dealers and trading activity on Canada’s debt and equity marketplaces. It sets and enforces rules regarding proficiency, business and financial conduct for investment dealers and their registered individuals.
Additionally, IIROC operates under the oversight of the Canadian Securities Administrators (CSA), which is an umbrella organization of provincial and territorial securities regulators. Each province and territory in Canada has its own securities commission or Regulator that works in conjunction with IIROC to ensure compliance with local regulations.
Complaints about broker-dealers in Canada are made to the provincial securities regulator.
Financial Planners in the US and Canada can only sell stocks upon meeting specific licensing requirements. Hence, a Financial Advisor is not necessarily a Stockbroker.
A Financial Planner offers advice and guidance on personal financial matters, including saving and investing, insurance, taxation, retirement, and estate planning and taxation. If a certified financial planner is not licensed to sell securities, mutual funds or insurance, they must refer their client to a licensed stockbroker.
To sell stocks in the US, a Chartered Financial Analyst (CFA) and as Certified Financial Planner (CFP) must obtain as series 7 license. A chartered financial analyst whom holds as Series 6 license is only entitled to sell “packaged securities”, such as mutual funds and variable annuities. A financial advisor with only a Series 6 may not sell individual stocks or bonds.
Every State requires a Series 63 license for financial advisors to conduct business within its borders.
For financial advisors compensated with fees every State also requires a Series 65 license. A 65 license is not required for financial advisors whom are compensated by commission.
Examples of professional designations held by individuals in the field of Financial Advisors in Canada which affects the services they provide include: Certified Financial Planner (CFP); Registered Financial Planner (RFP); Personal Financial Planner (PFP) – (chartered banks only; Financial Planner (FP) – (in Quebec).
To sell stocks in Canada, a Financial Advisors must meet specific licensing requirements, as follows:
- Complete the Canadian Securities Course (CSC).
- Pass the Conduct and Practices Handbook (CPH) Course. This course covers the ethical and regulatory standards required for working in the securities industry.
- Pass the 90-day Investment Advisor Training Program.
- Within 30 months of obtaining designation as a “registered representative”, the Registrant is further required to meet the post-licensing proficiency requirement to complete the Wealth Management Essentials course.
- Register with a Securities Regulator: After completing the necessary courses, a Registered Representative must register with a provincial or territorial Securities Regulator.
- Complete Ongoing Continuing Education: To maintain their license.
- is also required to complete 30 hours of professional development (product knowledge) and 12 hours of compliance training every three-year continuing education cycle as set out by the Investment Industry Regulatory Organization of Canada in order to stay updated on industry standards and regulations.
- To trade options and/or futures, a registered representative must pass the Derivatives Fundamentals Course in addition to the Options Licensing Course and/or the Futures Licensing Course, or alternatively, the Derivatives Fundamentals Options Licensing Course for options.
Advantages of Using a Stockbroker
Retaining as stockbroker to invest and manage your stock portfolio has several advantages as follows:
- Expert Advice
Stock brokers provide professional advice and insights based on their expertise and market knowledge. This is beneficial if you are a novice investor or you’d do not have the time to research individual stocks before buying them; or you do not have the time to undertake technical and financial analysis of stocks is a component of portfolio rebalancing. - Personalized Service
A Stock Broker can offer specific investment strategies that align with the and investors risk profile and goals, and investment time horizon. - Convenience
A stockbroker will buy and sell all of the stocks which are held in an investment portfolio, which will save an investor the time that is required to be dedicated to researching and buying and selling each individual stock in an investment portfolio. Utilizing a stockbroker to save time may be beneficial to an investor that has a busy schedule, where time is required to be utilized on other activities. - Access to Research and Tools – Most stock brokers have and can provide access to premium research reports, analytical tools, and market data to facilitate informed investment decision-making.
- Portfolio Management – Stock Brokers can facilitate better management of a stock portfolio that results in greater profit by rebalancing and investment portfolio on a quarterly, biannual, or annual basis to ensure the investment portfolio is aligned with an investors risk tolerance and investment goals, including achieving the desired annual profit target compared to the Benchmark that the Investment Portfolio is measured against.
Advantages of Self-Directed Investing
Choosing to invest and manage your stock portfolio has several advantages provided that you have the knowledge and time to do so, as follows:
- Lower Costs
Self-directed investing generally involves paying lower fees compared to cost of fees that are charged by a stockbroker for professional investment management.
Typically, the most common fees that are paid by an investor managing a self-directed investment account is a flat rate fee that is charged by the brokerage account when a stock is bought and another flat rate fee that is charged by the brokerage account when a stock is sold. This can lead to higher net returns over time. - Control and Flexibility
You have full control over your investment choices and strategies. This allows you to react quickly to market changes and take advantage of opportunities as they arise. - Potential For Superior Returns
The combination of lower costs in conjunction with greater control and flexibility over investment choices, strategies, and decision-making provides the potential for realizing Superior returns from an investment portfolio compared to retaining as stockbroker. - Educational Value
Managing your own investments can be a great learning experience. It can help you understand the markets better and improve your financial literacy. - Customization – You can tailor your portfolio to your specific preferences, whether that’s focusing on certain sectors, ethical investing, or other personal criteria.
- No Minimums – Many self-directed accounts have no minimum balance requirements, making it easier to start investing with smaller amounts of money.
Self-Directed Trade Commission Fees
The fee that is charged when you buy or sell stocks is commonly known as a “Trade Commission”. A trade commission is paid when an investor executes a Stock trade on the buy side and on the sell side of the brokerage transaction.
A Trade Commission fee is also called a base-trade fee or per-trade fee.
It is important to check out a brokerage’s fee schedule before you choose that brokerage for executing stock trades.
Many brokerages charge zero trading fees but they still make money from an investor in other ways.
Robinhood was the first online broker to offer commission free trading for stocks and ETFs in 2013 when its app officially launched. Robinhood’s decision to offer commission free trading disrupted the investment industry and caused several online brokerage firms to subsequently offer commission free stock trading including: Charles Schwab, Fidelity, Merrill Edge, E*TRADE, Interactive Brokers, TD Ameritrade, Webull, J.P. Morgan, Vanguard, SoFi, and Ally Invest (among others).
Most of these Trading Platforms continue to charge fees for executing trades of OTC stocks, options, futures, and other investment asset classes other than Stocks.
Automated (Robo) Investing
Automated Investing, also commonly known as Robo-Investing uses an algorithm to automatically construct, manage, and rebalance an investment portfolio based on the financial goals and risk tolerance parameters that are inputted into the trading platform by the investor. The investment parameters which are inputted into the trading platform by the investor are invoked by the trading algorithm to minimizes the involvement of an investor in the day today decision-making process of managing the investment portfolio.
The profitable execution of trades in a self-directed portfolio requires knowledge and expertise of:
1. technical analysis indicators
2. economic indices
3. economic news, and;
4. corporate news
relevant to each of the stocks that are held in portfolio; as well as Stocks being considered as a component of a Portfolio Rebalancing. This process requires a significant amount of time and continual learning.
Conversely, automated Investing requires minimal investment knowledge and time commitment from an investor since the algorithm within the trading platform performs all the technical and economic analysis, thereby making automated investing a good option for novice investors or those who lack the time that is necessary to dedicate. To the day-to-day management of realizing is successful and profitable investment portfolio.
Automated investing typically carries a lower degree of risk compared to self-directed investing due to the automated algorithm which is designed to build a diversified portfolio that specifically aligns with an investors risk tolerance. This approach to investing generally results in spreading the risk over multiple stocks which consequently mitigates the overall risk of the investment portfolio.
In the alternative, self-directed investing carries a higher degree of risk as a result of the responsibility of investment decisions which are solely decided by individual investor whom typically invests in a fewer number of stocks within a portfolio compared to an automated investing algorithm.
Automated investing generally offers limited investment options. Robo-Investing typically invests in exchange-traded funds (ETFs) or index funds that track the performance of a market or a sector. The result is a lack of flexibility, since an investor may not be able to invest in individual stocks, bonds, or alternative assets within an investment portfolio.
Automated (Robo) Investing Trade Commission Fees
The fees charged by an automated investment trading platform are typically based on a percentage of the investment portfolios Assets Under Management (AUM), and are commonly charged on an annual basis, The fees charged by an alternative investment algorithm are typically less than the fees charged by a conventional investment advisor. However, the fees charged by an alternative investment algorithm are more than the fees that accrue from a self-directed investment trading platform. Consequently, although the fees charged by an alternative investment algorithm are less than the fees charged by a conventional investment advisor, the fees can still add up and reduce the Return or Profit from an investment portfolio compared to a self-directed investment trading platform.
Direct Market Access Brokers (DMA)
Sophisticated Investors may choose to do High Volume or High Dollar Value Trades through a “Market Maker” known as a Direct Market Access Broker (DMA) whom utilizes an Electronic Communications Network also commonly known as an “ECN” to execute the “Buy” side and the “Sell” side of a trade.
ECN trades for a specific Stock are executed without a Stockbroker, but are fulfilled electronically by the ECN Trading Platform, between a Buyer and a Seller based on matching of a Bid and Ask Price for any specific Stock.
There are several benefits to using a Market Maker whom utilizes an ECN; these are as follows:
- Block Trades
Large Trades can be broken up into smaller “Block Trades” so as not to disrupt the Price Action of a Stock that might result if multiple “Block Trades” were executed on the Buy or Sell side as a single transaction. - Real-Time Market Data
ECN’s typically provide NASDAQ level I quotes and NASDAQ level II quotes in real-time. ECNs display the best available bid and ask quotes, quotes size, the last trade, and volume for any specific stock, from multiple market participants; which ensures more transparent pricing. - Faster Execution of Trades
Since ECNs automatically match buy and sell orders, trades can be executed more quickly compared to utilizing traditional trading platforms. When used in conjunction with real-time pricing and market data an investor is more likely to execute a trade at the price they want, particularly in a market where price action is fast-moving, given that an ECN can execute trades more quickly compared to a traditional trading platform. - Lower Trading Costs – ECN’s typically offer a tighter range between the bid and the ask price compared to conventional trading platforms. Consequently, ECN trades are frequently executed with a tighter spread between the bid and the ask price, which can reduce the cost of trading compared to utilizing a traditional trading platform.
- Increased Transparency – ECNs display the best available bid and ask quotes from multiple market participants which ensures more transparent pricing compared to utilizing a traditional trading platform.
- Anonymity – An ECN Trading Platform enables investors and traders to execute a trade anonymously; which has the benefit of disguising or cloaking high-volume trades. The anonymity provided by an ECN Trading Platform facilitates a smooth functioning of the stock market given that large Block Trades cannot be identified as being executed by one investor. This is due to the fact that a single Investor whom executes a large Block trade remains anonymous as a buyer or seller. The consequence of anonymity provided by any ECN is that large block trades executed by a single buyer or seller do not disrupt the Price Action for a specific stock.
Additional, more detailed information on Direct Market Access Brokers (DMA) and Electronic Communications Networks (ECN) can be found in the following Chapters of this book:
• Market makers
• Order Routing
• Hidden & Iceberg Orders – Trading Strategy
Which is Best For Investing & Trading: Full-Service Brokerage Firm Utilizing a Stockbroker; Self-Directed Investing; Automated (Robo) Investing; or a Direct Market Access Broker
Whether an investor uses professional Stock Broker, Self-Directed Trading Platform, an Automated Robo Trading Platform, or a Direct Market Access Broker (DMA), should be dependent on the investment knowledge, time availability, the services that are required by an Investor, and the personal preferences of each individual investor. All four distinct Brokerage options have their own positive and negative characteristics.