After May 1, 1975, the fees charged to the biggest clients, like institutions, dropped rapidly. Individual investors, however, still pay relatively high commissions per transaction. This led to a new business – discount brokerage. These firms advertise their fee structures as being anywhere from 50%, 75% or even 90% below the fees charged by full service brokerage firms. In order to do so profitably, discount brokers don’t offer any investment advice.
The brokers working at a discount brokerage firm receive salaries. This contrasts with brokers at full service firms, who support themselves on fees received from their clients. The overt goal of using a discount broker is to reduce the transaction cost. Investors must make their own investment decisions. Of course, low transaction costs are a small comfort if those decisions are faulty. Also remember that investors can, and do, negotiate fees with full service brokerage houses.
Similar to full service brokerage firms, the discount brokers discount their fees the most for their biggest clients. This is logical because all firms have their fixed cost of executing transactions whether they buy 10 or 10,000 shares of stock. The minimum transaction cost charged by a discount broker runs around $50. Now I’ll wider describe two types of investment accounts.
Types of Investment Accounts
Using the ownership criteria investors can open the following accounts:
• Individual Accounts,
• Joint Accounts,
• Corporate Accounts,
• Unincorporated Accounts,
• Fiduciary Accounts.
Using the function criteria investors can open the following accounts:
• Cash Accounts,
• Margin Accounts,
• Central Assets Accounts.
Before an individual can open his account his broker has to check his financial references. In addition, he has to get acquainted with his financial situation and learn about his financial needs. An investor provides this information by filling out the application for opening an account. The application contains the following data:
• last and first name,
• address and phone number, as well as place of employment,
• social security number,
• investor’s profession and name of employer,
• financial resources i.e. assets, income.
• bank and other financial institution references,
• how the account was acquired, e.g. referral, via internet, walk-in, radio, newspaper ad or TV advertisement.
A joint account has two forms – Joint Tenants Agreement with the Right of Survivorship (JWROS) and Tenants in Common Agreement. A JWROS is used almost exclusively by husbands and wives. A deceased tenant’s fractional interest in the account is retained by the surviving tenant(s). A Tenants in Common Agreement is used by two siblings or close friends. If one tenant dies, the fractional interest in the account is retained by his estate.
A corporate account is opened in the name of a corporation. The broker must ensure that the person with whom he is dealing with is fully authorized to buy and sell securities on behalf of the corporation.
Unincorporated accounts include partnerships, charitable organizations, schools, churches, hospitals, investment clubs and hedge funds. The investment firm must receive copies of resolutions nominating individuals who can place orders in the account.
Fiduciary Accounts are opened by any person legally appointed and authorized to represent and act in another person’s behalf. This person is called a fiduciary. This term includes executors, administrators, trustees (under any type of trust), guardians, and committees for incompetents. The fiduciaries are usually nominated by a court and the court’s documents must be submitted to an investment firm in order to open such an account.
A cash account is an account in which a client purchases securities and pays for them in full.
A margin account enables an investor to buy or sell stocks on credit. Investors must sign a margin agreement which specifies the conditions to obtain loans. It also enables an investment firm to lend the securities belonging to one investor to other investors. In the case of purchasing on credit, the investor leaves purchased securities with the firm as collateral. In case of selling on credit, the investor borrows securities from the investment firm leaving cash as collateral. The Federal Reserve Bank regulates the maximum amount that an investor can borrow. In 2015 investors could borrow up to 50% of the stock value.
Central Asset Accounts
Merrill Lynch introduced a central asset account in the late seventies. This account became an immediate success and is currently used by millions of investors. Brokerage firms offer these accounts under different names. A central asset account allows investors to conduct a multitude of different transactions which are consolidated and presented in one monthly statement. This account allows the investor to buy and sell stocks, bonds, and options, and automatically sweeps free reserves into a money market account. It also allows the investor to access money via free checking accounts or through debit cards. Investors can also borrow money or buy securities on margin. Investors should decide how useful these features are and whether they are worth the annual fees.
The fees for central asset accounts vary from $40 to $125 per year. The advantage of this account is an automatic reinvestment of cash, an ease in transaction monitoring, free checking account and a simple way of getting credit. The minimal capital requirement varies from $10,000 to $100,000.