To get the most out of trading options you not only need a solid understanding of the subject but you should also ensure that you use one of the best brokers, as this can really help you in your trading career. However, with there being such a huge amount of brokers around it can be difficult to know which one to use.
In our section on the best brokers we have made a number of recommendations of reputable online brokers, and classified them into different categories to make it easier to find a broker that is suitable for you. If you want to sign up for an account with an online broker then we would advise you to take a look through these recommendations before signing up anywhere.
You can see all our top recommendationshere.
Before you go down the route of choosing which online broker to use, though, there is one particular decision that we would suggest you make first. You should really decide whether you want to use a full service broker or a discount broker. If you are not sure about the differences between the two or would like some help making this decision, we have provided some useful information and advice on this page.
What's the Difference?
Traditionally, most financial brokers could be firmly placed in one of these two categories: a broker that offered a complete service to its customers including providing professional advice and expert guidance or a broker that simply executed orders on behalf it clients as instructed. The first example being a full service broker and the latter being a discount broker.
Although these descriptions can still be applied today, the evolution of online trading has changed the way most places operate and the line between the two main types of broker has become somewhat blurred. With a lot of online options you can pick and choose exactly what services you do and do not want included and are then charged accordingly.
Therefore it is actually quite difficult to clearly label a broker as either full service or discount; many of them can be either one depending on what the customer wants. Of course, this means that you still have a decision to make about whether you want the full service or the discount service. We have provided details on the advantages of disadvantages of using either particular type of broker below.
Full Service Brokers
A full service broker, or an online broker that offers a full service, is appropriately named because what they essentially do is provide a complete service to clients. When you open an account with a full service broker you will usually be allocated an account manager to look after you. Your account manager will then typically spend some time understanding your personal financial circ*mstances and what objectives you are trying to achieve through trading, and will then help you put together a suitable plan for reaching your goals.
You will probably get regular advice on what trades to make and when, and updates on your trading performance. Your account manager will carry out any transactions that you instruct them to, and will also likely be able to provide you with advice on those transactions if requested.
The main advantages of using a full service broker are fairly self-explanatory. Having someone to guide you and offer advice can prove to be invaluable, particularly if you are relatively new to trading options or if you don’t have much confidence in making your own decisions. Their experience and expertise can be invaluable to you, and can accelerate the rate at which you learn and improve your own skills.
Full service brokers can also be a good choice if you don’t have much time to carry out research and identify suitable trading opportunities. They can also be very useful in helping you fit your trades around your financial circ*mstances and personal objectives.
The main disadvantage of using a full service broker is basically the costs involved. As you can imagine, having a professional to give you advice that is based on years of experience and expertise doesn't come cheap. The commission structure at full service brokers is typically higher than at discount brokers and there may well be a range of additional fees too. Bearing in mind that full service brokers are particularly useful for beginners, and many beginners start out trading options with relatively small sums of money, this can become an issue.
It's also worth noting that your account manager will possibly encourage you to make more trades than you might choose to, in order to ensure that you pay plenty of commissions. However, this isn't particularly common at reputable brokers. If you stick to reputable options brokers and the extra costs associated with the full service aspect are manageable and worth it to you, then using a full service broker can certainly be a good choice.
Discount Brokers
Using a discount broker is somewhat more straightforward as there is much less involved. A discount online broker is basically just there to carry out your trades for you when you place your orders.
If you have an account with a discount broker you will probably not have any personal interaction with anyone, but you will have access to their trading platform from where you can place your options orders as required. The online broker will then automatically process those orders and execute the required transactions on your behalf. The best discount brokers make the process for this as simple and user friendly as possible.
The big advantage that discount options brokers have over full service brokers is the commission structure. The commissions at a discount broker will generally be noticeable lower than at a full service broker, as the broker is providing you with a far more basic service. There is likely to be less in the way of additional fees too, and a lot of discount brokers have very low minimum requirements for the size of deposits and trades – something that is important for traders that are working with small amounts of investment capital.
Many discount brokers offer further discounts on their commissions for traders that are making a lot of transactions, so these brokers can be a good choice for active traders that make a lot of trades on a daily basis.
Of course, when you are using a discount broker you are essentially on your own and you don't have the added benefit of someone to offer you advice should you require it. You will be entirely responsible for identifying your own trading opportunities and deciding whether or not your planned trades are a good fit for your financial circ*mstances and financial goals.
It's worth pointing out, though, that many discount options brokers do have a selection of available tools that can be used to help with your research and trading. However, to use these tools you might have to pay additional fees or at least be regularly paying a decent amount in commissions. The bottom line is that if you are comfortable with making your own decisions without any assistance and/or paying low commissions is of particular importance to you, then discount options brokers are likely to be the best choice.
Conclusion
As you can see, the differences between full service brokers and discount brokers are relatively obvious. However, as we have already pointed out, online options brokers don't necessarily fall into one category or the other and the distinctions between the two types of broker are not as marked as they traditionally were.
While it's still very useful to understand how full service brokers and discount brokers differ to each other, you will find that a lot of reputable brokers effectively offer both and you can open an account and then select the level of service that you require. You can usually also change the level of service at a later date if you want to.
Whether you want a full service or a discount service is just one of quite a few factors that you need to consider when deciding which broker to sign up at, but it's without question one of the most significant. You will find, as we have just mentioned, that many brokers offer both services these days, but it really is still very important that you have a clear idea in your mind about exactly what level of service is best for you and your requirements. You must then ensure that an online broker can provide you with that level of service before you actually go ahead and open an account with them.
