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Monday, March 14, 2011

Pros and cons of using online brokerage firms

Online brokerage accounts are self-guided money management command centers in the sense they offer a lot of sophisticated financial tools and instruments such as stock options trading platforms, margin accounts, currency trading analysis tools etc. that allow individuals considerable control over the investment process. The pros and cons of using online brokerages are that they offer a lot of flexibility and opportunity, yet also require a fair amount of know how and independence.

Use of an online brokerage account can increase personal exposure to financial risk and may require a significant amount of time to effectively choose and manage investments. In some cases online brokerage accounts may be less than ideal for implementation of dynamic financial plans involving intricate tax strategy and estate planning.

Pros of online brokerage firms


• Research reports

An advantage of online brokerage accounts is access to research that might not otherwise be accessible via other information sources. Investment research is used to help inform financial decisions and educated the investor about a particular company, fund or financial instrument.

• Investment tools

Another feature of using many online brokerage accounts are the tools readily available to the account holder. These tools vary in function and complexity and help determine bid ask spreads, interpret price movements, assess investment potential etc. Examples of investment tools include heat maps, options price tables, trading platforms,  and technical analysis graphs.

•  Self-managed

Online brokerage accounts are ideal for the well-informed, individual investor who understands fundamental principles of money management. This does not mean individuals knew to the world of investing shouldn't or can't learn how to use an online brokerage account, but it does imply a certain amount of self-guidance.

Cons of online brokerage firms


•  Higher risk

Brokerage accounts have the potential to be very risky. This is especially the case with margin accounts and option trading. Even non-leveraged investments are subject to considerable price volatility. In other words, the financial instruments available through online brokerage accounts are often of medium to high risk.

•  Limited Advisory services

Although some brokerage firms also offer access to retail offices, the majority don't, and broker assisted orders generally cost a higher fee and aren't a standard service. For the most part, investment advisory services cost extra and are better facilitated with a financial adviser. Educational tools are available with online brokerage accounts but without supplementary instruction.

•  Discretionary money management

Another option that may not always be available with an online brokerage account is discretionary money management. This is when a financial services firm such as an investment bank provide complete money management services including advising and money management. Discretionary money management allows the investor to choose to have their money managed by financial professionals.

Sources:

1. http://bit.ly/a3O8Nm (Investopedia)
2. http://bit.ly/acXFw9 (TopTenReviews)
3. http://bit.ly/9CcTho (Wells Fargo)
4. http://bit.ly/cruvCQ (Fidelity)