The fundamentals of stock market investing
Stock Commissions Vary Widely
Depending on who your stock broker is, you can pay
as much as $700, or as little as $7, for a simple stock trade.
BY JERRY HELZNER
A friend of mine recently had to sell a couple of hundred shares of ExxonMobil stock to pay for his daughter's college tuition.
"When I saw the commission that the stock broker charged me, I almost hit the roof," my friend complained. "I had to pay that firm almost $700 just to execute a very simple order for me."
I had to tell him that I would have been charged $19.95 by my nationally known online broker for executing the exact same order. What I didn't tell him was that some investors who do their trading online can get that order done for as little as $7.
"So I paid almost 35 times more than you would have paid to do the same order," my friend noted. "Am I just stupid or am I being taken across?"
Actually, my friend is neither stupid nor a victim of chicanery. He's typical of the many investors who deal with a so-called "full-service" stock brokerage firm and who make only a small number of stock trades. Investors such as my friend usually get charged what we can refer to as "list price" on the rare occasions when they do make a trade.
ILLUSTRATION: AARON MCCLELLAN
YOU CAN GET A DISCOUNT
To avoid getting charged list price on stock transactions, you have to be proactive on your own behalf.
If you have confidence in your full-service broker and depend on her for investment advice and counsel, you can always ask in advance what the commission will be on a specific stock transaction. If the commission sounds high, you can request a discount. And if the broker values your business even a little bit, you can usually get a 20 to 30% discount off the firm's list price commission.
But if you really want to save some money on your stock transactions, you're going to have to open an account with a discount broker such as Charles Schwab, TD Waterhouse, Ameritrade or any of the other reputable, nationally known discount firms. The major discount brokers are well capitalized and many of them are subsidiaries of large banks. For example, TD Waterhouse is owned by Toronto Dominion Bank, one of Canada's largest banks.
DISCOUNTERS OFFER CHOICES
While discount brokers offer their lowest commissions to active traders who execute their trades online, investors who trade infrequently and who are willing to use a touch-tone phone to place orders, can still qualify for commissions that are far lower than what full-service brokerage firms charge. Most discounters even have real, live stockbrokers who'll place your orders if you're afraid that you'll make a mistake using an automated system. You'll pay more for the privilege of dealing with a real person, but you'll still save.
Essentially, the major difference between a discounter and a full-service firm is that your full-service broker will provide you with specific stock recommendations based on research conducted by the firm's team of securities analysts. Your full-service broker will also serve as something of a personal investment counselor who'll work to build a long-term relationship with you.
Your relationship with a discount firm will usually be more impersonal, though some discounters will assign you to a "personal" broker who you can call if there's any problem with your account. Discounters are also willing to supply you with a large amount of general stock market information, but it's still your responsibility to make your own decisions on which stocks to buy or sell.
YOU CAN HAVE TWO BROKERS
If you want to have the best of both worlds, you can have two accounts -- one with a full-service firm and one with a discounter. That way, you can get the stock recommendations you want and then divide your business between the two firms. You can go this route, as long as you do a reasonable amount of business with each firm.
Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.
He is currently Associate Editor for Ophthalmology Management Magazine.
Optometric Management, Issue: June 2002