Licensed brokerage firms provide brokerage accounts, which serve as your portal to invest your money. It is through this tool that you, the investor, place orders which are subsequently executed on your behalf by the firm. You own the assets contained in the account, and any capital gains or dividends received must be claimed on your income tax return.
NOT All BROKERAGE FIRMS ARE EQUAL
Some will have different execution times, analysis tools, types of tradable assets, or varying degrees of available investment advice, hence the difference in commissions charged from one firm to another. As we will see later, there are also multiple different types of accounts that you can open.
An important element of brokerage accounts is the commission that is charged for conducting transactions on your behalf. They typically range anywhere from $0 to $40 depending on the brokerage and the level of human support provided in the transaction. Aside from management fees that come from getting direct advice from a broker or advisor, these fees are typically what allow the firms to make money.
THE BROKERAGE WITH THE LOWEST COMMISSION IS NOT NECESSARILY THE BEST ONE
This is a key thing to keep in mind. As mentioned before, different brokerage firms prioritize different services. For example, discount brokerages offer mainly online trading platforms for do-it-yourself or self-directed investors, where an individual is responsible for conducting their own research and decides which securities they would like to buy. Brokerage firms may also provide investment advice and personal support, but generally, charge additional fees for extra assistance.
*Note: When working with an individual broker, it is important to be aware of the conflict of interest that can sometimes arise between brokerages and their clients. Since commission-based brokers need more transactions in order to increase their revenue, unethical brokerage firms may encourage their clients to make more trades that are necessary as it relates to that investor's investment objectives.