Stock Investing

If you’re considering investing in shares of a clean technology company then it’s very important that you understand how brokers operate and how your orders will be executed. This page tells you everything you need to know about order execution.

You might not naturally consider how or where your broker will execute your trades when you decide to buy or sell stock, but these things can have significant implications for both the price you will pay for the stock and your transaction costs over the long term.


Brokerage Fee Models

The following extract is from http://bestbrokerdeals.com/per-trade-vs-per-share-broker-fees/ and explains the differences between fee per share and fee per trade brokerage models.

“All stock and ETF brokers charge commissions (the fees you pay to trade) on either a ‘per trade’ or a ‘per share’ basis. When comparing brokers, per trade vs per share fees are something you will want to consider, as the right choice can make a huge difference to the overall success of your investments.

Per trade is by far the more common model, available with the majority of online discount brokers, and many investors are not even aware of pay per trade options, but depending on your trading habits this may actually be a significantly lower cost choice for you.

The Pay Per Trade Fee Model

Pay per trade means that if you buy or sell a block of shares then you will be charge a fixed amount by the broker for doing so. This amount will be the same regardless of whether you’re a regular investor purchasing 100 shares for your retirement account, or you’re a hedge fund manager accumulating a position by buying block of 10,000 shares at a time.

The advantage of the pay per trade fees approach is that there is a maximum cap on how much you will pay, regardless of how much you buy.

The Pay Per Share Fee Model

With pay per trade your broker will charge you based on the number of shares that you buy or sell. If you are buying a few hundred shares then it will cost you far less than if you’re buying tens of thousands. There is also a minimum per trade fee that will be charged, usually equal to 100 shares. So if you’re buying literally just a handful of shares then you’ll still be charged as though you’re buying 100. The minimum per share fee is always significantly lower than per trade fees, so if you’re buying and selling extremely small blocks of shares then it will still be the more economical option.


Trade Execution Isn’t Instantaneous

The following sections are an extract from http://www.sec.gov/investor/pubs/tradexec.htm

“Many investors who trade through online brokerage accounts assume they have a direct connection to the securities markets. But they don’t. When you push that enter key, your order is sent over the Internet to your broker—who in turn decides which market to send it to for execution. A similar process occurs when you call your broker to place a trade.

While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fast-moving markets. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time your order reaches the market, the price of the stock could be slightly – or very – different.

No SEC regulations require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays.

Your Broker Has Options for Executing Your Trade

Just as you have a choice of brokers, your broker generally has a choice of markets to execute your trade:

  • For a stock that is listed on an exchange, such as the New York Stock Exchange (NYSE), your broker may direct the order to that exchange, to another exchange (such as a regional exchange), or to a firm called a “third market maker.” A “third market maker” is a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices. As a way to attract orders from brokers, some regional exchanges or third market makers will pay your broker for routing your order to that exchange or market maker—perhaps a penny or more per share for your order. This is called “payment for order flow.”
  • For a stock that trades in an over-the-counter (OTC) market, such as the Nasdaq, your broker may send the order to a “Nasdaq market maker” in the stock. Many Nasdaq market makers also pay brokers for order flow.
  • Your broker may route your order – especially a “limit order”– to an electronic communications network (ECN) that automatically matches buy and sell orders at specified prices. A “limit order” is an order to buy or sell a stock at a specific price.
  • Your broker may decide to send your order to another division of your broker’s firm to be filled out of the firm’s own inventory. This is called “internalization.”In this way, your broker’s firm may make money on the “spread” – which is the difference between the purchase price and the sale price.

Your Broker Has a Duty of “Best Execution”

Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, your broker has a duty to seek the best execution that is reasonably available for its customers’ orders. That means your broker must evaluate the orders it receives from all customers in the aggregate and periodically assess which competing markets, market makers, or ECNs offer the most favorable terms of execution.

The opportunity for “price improvement” – which is the opportunity, but not the guarantee, for an order to be executed at a better price than what is currently quoted publicly – is an important factor a broker should consider in executing its customers’ orders. Other factors include the speed and the likelihood of execution.

Here’s an example of how price improvement can work: Let’s say you enter a market order to sell 500 shares of a stock. The current quote is $20. Your broker may be able to send your order to a market or a market maker where your order would have the possibility of getting a price better than $20. If your order is executed at $20.05, you would receive $10,025.00 for the sale of your stock – $25.00 more than if your broker had only been able to get the current quote for you.

Of course, the additional time it takes some markets to execute orders may result in your getting a worse price than the current quote – especially in a fast-moving market. So, your broker is required to consider whether there is a trade-off between providing its customers’ orders with the possibility – but not the guarantee – of better prices and the extra time it may take to do so.

You Have Options for Directing Trades

If for any reason you want to direct your trade to a particular exchange, market maker, or ECN, you may be able to call your broker and ask him or her to do this. But some brokers may charge for that service. Some brokers offer active traders the ability to direct orders in Nasdaq stocks to the market maker or ECN of their choice.

SEC rules aimed at improving public disclosure of order execution and routing practices require all market centers that trade national market system securities to make monthly, electronic disclosures of basic information concerning their quality of executions on a stock-by-stock basis, including how market orders of various sizes are executed relative to the public quotes.  These reports must also disclose information about effective spreads – the spreads actually paid by investors whose orders are routed to a particular market center. In addition, market centers must disclose the extent to which they provide executions at prices better than the public quotes to investors using limit orders.

These rules also require brokers that route orders on behalf of customers to disclose, on a quarterly basis, the identity of the market centers to which they route a significant percentage of their orders. In addition,  brokers must respond to the requests of customers interested in learning where their individual orders were routed for execution during the previous six months.

With this information readily available, you can learn where and how your firm executes its customers’ orders and what steps it takes to assure best execution. Ask your broker about the firm’s policies on payment for order flow, internalization, or other routing practices – or look for that information in your new account agreement. You can also write to your broker to find out the nature and source of any payment for order flow it may have received for a particular order.

If you’re comparing firms, ask each how often it gets price improvement on customers’ orders. And then consider that information in deciding with which firm you will do business.”


Decide on the type of broker you require

The following is an extract from http://investor.gov/researching-managing-investments/working-investment-professionals/brokers-advisors#.U0-iW15H0lJ

“Brokers execute trades for customers and are generally paid commissions when you buy or sell securities through them. …

Brokerage firms vary widely in the quantity and quality of services they provide for customers. Some have large research staffs and large national operations, and are prepared to service almost any kind of financial transaction you may need. Others are small and may specialize in promoting investments in unproven and very risky companies. And there’s everything else in between.

A discount brokerage charges lower fees and commissions for its services than what you’d pay at a full-service brokerage. But generally you have to research and choose investments by yourself.

A full-service brokerage costs more, but the higher fees and commissions pay for a broker’s investment advice based on that firm’s research.

You’ll want to find out if a broker is properly licensed in your state and if the broker or firm has had run-ins with regulators or received serious complaints from investors. You’ll also want to know about the broker’s educational background, and where he or she worked previously. Using BrokerCheck, you can search for a brokerage firm or individual broker. Your state securities regulator may provide more information, so you may want to check with them also.

The Securities Investor Protection Corporation (SIPC) may protect you if a brokerage firm goes bankrupt or if your securities are stolen. You should check whether your brokerage firm has this important coverage. SIPC does not protect you against declines in your investment holdings.

“In addition…there are a number of non-profit educational and consumer organizations that offer free tools to help investors check financial professionals.  For example, AARP offers a Financial Adviser Questionnaire which highlights that “Many people feel intimidated when confronting an “expert” and are hesitant to ask questions.

For this reason, AARP has developed a questionnaire that ordinary investors can give to brokers, advisers or others in the investment business to help investors evaluate whether they can entrust their money to the person who fills it out.”

It is also worthwhile checking out your advisor online and there are a number of reputable sites where this can be done, e.g. investment advisor search: http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx

Full Service Brokers

For those without any financial experience or who want the comfort and security of handholding – and just as importantly, don’t mind paying for it – a full service broker can be worth the cost.

Although services and products are not fully uniform and costs will vary from firm to firm, typically you should want some or all of the following from your full service broker:

  • Access to research on stocks and bonds
  • Retirement planning
  • Tax preparation and strategies
  • Experience
  • Opportunities to invest in certain private equity or hedge funds

Perhaps the biggest benefit for someone without experience is the opportunity to have a reputable firm guide you through the process. Although it is highly probable that the fees will cut into your returns, you may be better off in the long run because a good broker can hold your hand through turbulent markets, helping you to avoid mistakes such as selling at market bottoms or buying during speculative bubbles.

Discount Brokers

Discount brokerage firms charge lower commissions than full-service brokerage firms when they execute investors’ buy and sell orders but may provide fewer services to their clients.

For example, they may not offer investment advice or maintain independent research departments.

Because of the information and online account access on most brokerage websites, differences between full-service and discount firms are less apparent to the average investor.


Different Order Types

The following is an extract from http://www.investopedia.com/articles/02/110102.asp

“You may or may not be aware that most discount brokerages charge a different price for limit orders than for market orders. A market order is an order to buy or sell a stock immediately at the best available price. A limit order is an order placed with a brokerage to buy or sell at a specific price. Placing a limit order with some brokers can cost as much as $5 more than a market order. If you use a limit order, make sure the price you pay more than offsets the extra $5 you will be charged on the commission. (Using limit orders can be an important way to protects your assets. See Protect Yourself From Market Loss.)


Compare Brokers

As you will now be aware, there are a large number of brokers who offer a variety of services. One broker review site that claims to provide “unbiased reviews and ratings of online brokers.” is BestBrokerDeals.com. They review and rank brokers using a quantitative scoring matrix, allowing you to compare stock brokers objectively and find the most suitable firm for your needs.

stock investing