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The Brokerage Industry
The Smart Profits Report: Issue #105
Monday, April 26, 2004
The Brokerage Industry: Why Your Broker Drives a Porsche and You Drive a Chevy
By Karim Rahemtulla
Chairman, Mt. Vernon Research
I began my financial career in the brokerage industry. I was not a broker, but the financial officer of a holding company that owned a small regional firm.
What I learned, I could write a book about.
You should know what brokers think about commissions and options. Consider this a primer to the whole financial industry - full-service and the online do-it-yourself brokers alike.
The brokers who worked for my company loved options traders. They were the wild ones - 99% had no system, no experience and no idea about what they were getting into. These were the Saturday night specials - the ones who went to the convenience store an hour before the Lotto machines closed down for the Saturday-night drawing.
Instead of warning these perennial losers not to trade options - and considering their results, somebody should have warned them - the brokers encouraged them to keep it up. Why?
Brokers Love Commissions
Because options expire. That means commissions on a regular basis . . .
Here’s the deal: When you buy a call or a put, you pay a base commission and a dollar amount per contract. This per-contract amount varies from $1 to $2. Then, when you sell the option, you pay a similar commission again. Some brokers even have the gall to charge you a higher price per contract depending on the price of the option. This is pure BS.
When you buy an option, let’s say 10 contracts, you should not be paying more than $25 with an online broker and no more than $40 with a full-service broker… regardless of the contract price. That’s it. Nada mas. Period. If you are paying more, then you are being RIPPED OFF.
Brokers and Options - A Love Affair
Why do brokers love options? That’s an easy one. Options trading means big commissions on a frequent basis.
Tell me: If you were a broker whose sole source of income was commissions, what type of customer would you rather have? Would you like customer “A”, who buys a couple of positions a year and just sits on the stock? Or would you like the options jockey who not only loves the quick in and out, but has positions that have MANDATORY EXPIRATIONS every month or two?
If you’re an options trader - even a good one - YOU are the pot of gold at the end of the rainbow. What can you do about this?
You can find a broker - online/discount or full-service - who can fulfill your options trading needs without taking you to the cleaners at the same time.
Commissions are a part of doing business. And in this business, you get what you pay for-some of the time. But many of the most expensive brokers are not especially good at options trading. And some of the least expensive are great. Price is important, but unfortunately, it’s no guide to quality. So, here’s a shortcut: a listing of recommended brokers. Each one satisfies a particular type of investor.
The Best Brokers I Know…
- If you are a do-it-yourself investor, use a discount broker. They have good execution and very low commissions.
- A good full-service recommendation is GunnAllen Financial. Oxford Club members have been using Greg and Ron for a while. For a listing of other full-service brokers, click here.
Which Is Best? It depends. A discount/online broker is just a transaction service. You are a number. But, if you know what you are doing and have the time to decide on every trade yourself and put in the order, then you should use an online full-service broker.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Crib Sheet
- To learn more about any options terms from today’s report, please visit the Smart Profits Glossary.
Related Articles:
- How To Effectively Handle Any Broker: Secrets To Getting Started In Options
- Why Choose A Full-Service Broker: Get Your Option Prices Filled Everytime
- Option Prices: How to Get the Best Price on Your Options
