Savers put money to work within financial markets to build toward important life goals, such as first-home purchases and retirement funding. Brokerage firms are a part of this process, as they facilitate transactions that match corporations in need of capital, alongside savers in search of investment opportunities. Retail brokerages serve to effectively level the playing field between professional Wall Street traders and smaller Main Street savers.
How Retail Brokerage Works
The Securities and Exchange Commission identifies brokerage firms as fiduciaries that execute financial transactions on your behalf. Retail brokers specialize in accommodating smaller and middle-market clients, who generally carry total account balances of less than $1 million. Retail clientele differs from institutional business, which includes larger corporations, private banks and independently wealthy individuals. Retail brokers use information technology to organize buyers and sellers together within financial markets. Stock markets operate as large auctions, and individual stock trades are executed at points where the lowest offering and highest bidding prices intersect.
Traditional and Discount Retail Brokerages
Retail brokerages may be classified as either traditional or discount brokerages. Traditional brokerages are associated with financial advisers that offer recommendations on stock market investments, insurance products and employee benefits. Advisers may charge annual fees to write comprehensive financial plans for retail clients. Discount brokerages, however, simply take orders and clear trades without providing advice. Discount brokerages are notable for their online investment capabilities and low commissions. This may be a good option for cost-conscious consumers who prefer to research their own investments.
Trading Commission Costs
Retail brokerage firms provide liquidity for smaller investors, allowing them to participate within the stock market. Liquidity is defined as your ability to convert any asset into cash. Professional investors may pay more than $1 million for stock exchange memberships, and the privilege to deal securities directly on the trading floor. Alternatively, retail brokerages provide Main Street investors with access to stock market technology for relatively small trading commission costs.
Retail Brokerage Education
Retail brokerages often provide extensive financial education to help prospects and clientele effectively navigate the stock market. Investment seminars, newsletters and consultations alert savers to the benefits of money management, and encourage them to invest wisely.
Brokerage Phishing and Churning
The Securities and Exchange Commission warns online brokerage clients against phishing scams. Phishing describes a process in which criminals steal your brokerage account information to log in and coordinate unauthorized trades and cash balance transfers. Anti-virus software minimizes the risks of hackers gaining entry into your personal information. Retail clients who hire full-service brokers are also susceptible to churning. Churning relates to recommendations that call for heavy trading activity within your account simply to increase brokerage commissions, rather than to improve your total returns.