What is in it for the brokerage firm
As tempting as the amenities provided by a brokerage firm may sound, ever wondered what’s in it for them? And why and how they can pull off these tempting offers to woo customers?
The answer lies in the different types of accounts a brokerage firm has to offer. There are usually three kinds of brokerage accounts:
Cash-management account which is the most basic type in this category is an account where the investor places his funds to make a trade. Depending upon the type of cash-management account, an investor may choose to have a full-service account, which provides expert financial advisors, helps develop investment plans, and at the discretion of the investor, can be chosen as his power of attorney. The broker helps manage the account for his client and charges a fee either as a commission or advisory fee. A consulting fee can be between 0.5% – 1.5% of the total account balance and a commission can be a small percent of the money invested in that particular commodity.
A margin account, which is a slightly sophisticated kind. In this case, the investor buys his securities with the money borrowed from his broker. However, these accounts have much stricter requirements and collaterals, and additionally, The Federal Reserve limits the borrowing margin to at most 50% of the total amount that was invested. Although, the brokers still charge a relatively minimal rate of interest, to ensure their customers are encouraged to invest in margin accounts.
The discount brokerage account is apt for the veteran investors, who are looking to be more independent when it comes to trading and investing. These accounts offer minimal services for a much significantly cheaper fee compared to that of a full-service account. Some online brokerage accounts such as E* Trade simply offers a secure platform, with no opening cost and a minimum deposit of as low as $500, with a commission fee of $10 per transaction.