About brokers, costs and investments on stock exchange

Actuality June 6, 2007

   Just recently only the few knew about the stock exchange, but today the financial competence of people constantly grows. And everyone who disposes some available sum of money can send them at work to gain profit from the securities motion at the market. If it goes about you, it means you are a potential investor! The present investor has investment tools and to spare, i.e. the opportunities to sent money to the stock market.

   The first way of money investing is mutual funds or bank-managed mutual funds. They are schemes of collective trust management. It means that a man who does not understand the stock exchange trade issues and does not have free time for independent operations on a stock exchange, gives his facilities to a management company (mutual funds) or a bank (bank-managed mutual funds). This company or bank collects all investors’ money into one pool and a competent trader manages them in terms of a strategy stated in the prospectus. But in this case a shareholder can not influence manager activities and determine the number of one or other assets in portfolio by himself.

 Portfolio is a collection of securities (assets) for facilities investment. Efficient portfolio counterbalances riskfree assets (e.g. bonds) by high-risky assets (e.g. stocks), and is called "diversification" in the managers’ language, i.e. capital stakes’ distribution in different securities.

   Apart from collective trust management, at the market of investments also exists the individual trust management. It allows an investor to form the investments portfolio by himself taking into account the desired profit, risks stability, managed by the private strategy. This is the second way to send money at work successfully.

   Investor’s capital is divided into two unequal parts. The lesser is invested into the options, highly reliable market tools allowing controlling risks hard and gain the unlimited profit at a favorable market situation. The bigger part is invested into bonds, low risky securities, which insure a capital part invested into the options. It enables to gain high profits at the complete control over a risk.

   Though these structural products are flexible, comfortable and have the variety of opportunities of individual portfolio forming, this service is not available for each investor, as the minimal investment sum into such product varies from $100 000 to $1 mln due to higher options cost.

   The third way of a present investor to the stock market is independent trade on a stock exchange. But a private investor can directly operate on a stock exchange only through a broker company which is the professional stock market participant, i.e. it is certified at the stock exchanges and has the proper licenses for the activity realization.

   In fact, broker companies (brokers) are intermediaries between a stock exchange, where circulate the securities and investors, who want to invest the money into these assets. When you conclude a contract with a broker, you have the opportunity to dispose your capital by yourself and spend it to purchase those securities which seem most interesting and profitable. Relations with a broker are formed by means of the broker and depositary service agreement signing. This agreement lists detailed cooperation terms with a company. And then a broker sets up two accounts for you: broker one, to keep money, and a deposit, to keep the assets purchased on a stock exchange.

   You can proceed to trading right after your facilities have been credited to the account. If you do not have the required skills for this, almost any large broker company will invite you to take the special training courses. The market professionals will tell you in details how stock exchanges function and what complications expect at you at transactions settlement. At extra charge, of course.

   Classic broker service implies several access paths to the equity market. If your PC is connected to the Internet, the special trading platform is installed to it, allowing to settle transactions at your convenience and from any point of the world (within the framework of trading session, of course). If you do not have Internet access, you can take advantage of the traditional method and make a bid by simply calling a broker and say you want to sell or purchase one or another asset. In this case a broker works on a stock exchange on behalf of the client. The third variant is a workplace lease in a broker dealing room.

   Dealing room is a special place in the office of a broker company, where a client gets a workplace for extra charge, equipped with all necessary tools to operate at the stock market (computer with installed trading platform, telephone etc.).

   Internet-trading is the form of stock exchange transactions settlement through the computer program. It provides the opportunity to operate on all accessible stock exchanges in the real time mode, and also react quickly to the changes of market movements.

 Broker companies develop their own trading computer programs quite often and offer them free, taking extra charge for the platforms of other developers.

   Three types of costs expect the investor in the process of cooperation with a broker company. First and foremost, the source of brokers’ profit is a commission from the clients’ transactions. As a rule it is a percent from the transactions volume for the period indicated in your tariff plan (trading day or month). Its size directly depends on the clients’ daily turnover sum. For example, the bigger turnover within the indicated term (day or month), the lesser is broker’s fee. However, another variant is possible. If a turnover is lesser than the indicated sum, the commission is not paid, and a small percent will be collected only from that turnover part, which has exceeded this indicated sum.

   The client is in the favorable position in terms of commissions paid monthly. The interest rate goes down at the accumulation of bigger transactions volume, and an investor saves at daily commissions, paying a broker only at the end of month. In any case, a player-beginner should study carefully the tariff policy of a broker. On the whole, all companies’ commissions are approximately the same today, quite available in terms of hard competition at the market.

   Secondly, an investor pays the stock exchange commission, which in no way depends on a daily turnover and transactions’ volumes, but is the one for all stock exchanges. The third type of costs is a fee for keeping and record of securities in a broker depositary. It can be collected as a monthly subscriber fee or for each position change on the deposit account. You should not forget about the income tax which a broker withholds in case of taking the facilities out of a company or upon calendar year end.

   Brokerage is rather developed; therefore the services package rendered to the investor by a broker can be named a model. All companies provide a client with the opportunity to settle transactions by the Internet, give the maximal information access (analytics, digests, informative line) and teach investors-beginners a stock exchange nuances. Hundreds thousands companies operate at the broker market, and you should pay attention at several important points so not to get confused with this overabundance and make a single correct choice.

Make sure, that a company you are interested in has all required licenses for broker, dealer and depositary activity and for trust management also.

   Broker experience at the stock market and his work history are also important. Did a company face the financial difficulties or lose any license? Financial indices also play an important role. They list the size of the company private facilities, turnovers at the market, the amount of active accounts etc. Pay your attention at the client service quality, performance, presence of additional opportunities in the company services package like access to the accounts through the private cabinet on a broker website, opportunity of electronic workflow between a client and a company, opportunity to sign reports by means of electronic digital signature. Study the terms of service in details. These terms list the size of the given leverage (a loan given by a broker as money or securities against your securities, which increases facilities on your account), the size of a primary sum, the amount of trading tools, and the transparency of tariff policy. Broker companies’ ratings represent rather fully a broker reputation, degree of his reliability, and also position stability at the market.