The New Investor's Complete Guide to Brokers
When you're ready to begin trading stocks, a brokerage will be your gateway to the stock market. Brokerage firms are companies that help you execute your trades, and they can be huge multinational full-service firms, tiny specialized small businesses, and everything in between.
The quality of your broker and your brokerage firm are crucial to a successful experience in investing. Whether you choose a stockbroker, commodities broker, futures broker, bond broker, or an all-purpose brokerage firm, it's important to know how to select professionals who are going to help you reach your goals.
This broker guide for new investors explains some of the things you need to look for when selecting a brokerage firm, including what fees to avoid, what services you may need, and how to protect yourself. It's part of our guide to investing in stocks.
Before you can select a brokerage, make sure you understand what exactly a brokerage account can do. These special investment accounts let you trade securities, including stocks, but they are subject to taxes and fees.
A brokerage account generally isn't limited in the amount of money you can deposit, unless it is an IRA or 401(k)—those are special retirement investment vehicles subject to particular federal regulations. You're also not limited in the number of brokerage accounts you can have—again excepting IRAs and 401(k)s.
How Do I Choose a Stockbroker or Brokerage Account?
There are two types of stockbrokers: full-service stockbrokers and discount stockbrokers. Which you choose depends on whether you prefer a high level of service at a premium price or full control at a lower price. If neither sounds quite right, many firms offer a hybrid level of service that lands somewhere in between.
Another important consideration in choosing an investment firm is how much cash you have on hand to invest. You might be priced completely out of the services of a firm if they require account minimums higher than you're able to fund. Other firms are ready for your business, though, with a minimum investment as low as $1.
Lastly, look for investor-friendly services, perks, and tools that will help you improve your trades and make better-educated decisions. They might be worth the added expense.
Tailored stock recommendations come at a price. Full-service stockbrokers can cost a lot of money through their higher fees, service charges, and commissions.
But the expense can be worth it for some investors, especially if you require a little extra hand-holding as you get started with investing. The important part is to know what you're paying for, so you can decide if it's worth the cost.
Some questions to ask yourself: Does the firm have the experience and reputation to justify their fees? Will they help you plan for retirement, advise you on tax strategies, or execute complicated or unusual trades? Can you trust their recommendations—do they have a history of good performance? After all, your financial future is in their hands. If you've done your research and can afford the expense, a full-service firm might offer the extra expertise you're looking for.
There are other ways to buy stock than through a full-service brokerage. If you want to buy shares in a specific company, you may be able to take advantage of what's called a "direct stock purchase plan" (DSPP). These plans allow you to buy stock directly from the company, whether as an employee or just as an investor.
Another way to buy stock without a broker is through a dividend reinvestment plan (DRIP), where you purchase more shares using your dividend payouts. Of course, this method is also offered through regular brokerages.
Stockbrokers don't work for free. When you hire a brokerage firm to handle your trades, they'll charge you an assortment of fees to cover their costs, and it's important to know what these charges cover—and what you're getting for your money.
Investment advisor fees vary by firm and even by account, often operating on a tiered system (where you're charged a percentage that decreases the more you have invested with the firm).
Custodial fees are the price the bank, or custodian, charges for safekeeping your securities. As custodian, the firm also collects your dividends and issues you statements of account. And if you have paper stock certificates and house them with a firm, they'll charge a safekeeping fee for holding it on your behalf.
Many stockbrokers and brokerage firms are doing away with the traditional brokerage account entirely and offering what's called an asset management account. These are hybrid accounts that combine banking, brokerage, and insurance services to customers looking to streamline their finances.
By consolidating their activity, these customers may be able to take advantage of services only offered to people with higher account balances. They also get to see all their financial activity in one place in their monthly statement, which some people might find convenient. And they might earn higher interest by using the attached money market account instead of using a regular checking account.
However, there are still management fees to consider using this system, and not everyone will be able to afford the usual minimum balance of $15,000.
Whenever you buy or sell an investment through your brokerage account, you are going to receive a special document called a trade confirmation from your stockbroker. Knowing how to correctly read a trade confirmation will help you sniff out any errors and avoid expensive mistakes.
This document will tell you the name of the investment you traded, the number of shares that changed hands and at what price, the dates traded, fees charged, and other relevant information. If any of this data appears to be in error, you must contact your broker immediately for a correction.
What Does It Mean When Your Stocks Are Held in Street Name?
If you invest through a broker, brokerage firm, or bank, the odds are extremely likely that your stocks, bonds, mutual funds, and other assets are held in a street name, not your own name. That's a common practice, and it simply means that the firm is holding your shares for you. Your brokerage has a detailed accounting system in place to track what shares you own, which is necessary because you didn't buy actual paper stock certificates with your name on them. It's an accepted practice, but, if you like, there are ways to make sure your shares have your name on them.
If My Broker Goes Bankrupt, Do I Lose All of My Money?
Smart investing is about being prepared. While rare, it's possible that your brokerage might declare bankruptcy. How can you protect yourself? Know whether your broker is covered by the Securities Investor Protection Corporation (SIPC). The SIPC does not insure you against losses, but it will replace your shares in the event that your brokerage goes under and help you transfer your investments to another company.
The Next Step: Stock Trading
Now that you understand stockbrokers and brokerage firms, you can learn how to actually begin trading stocks within your account.
Trading stocks can be intimidating if you don't know what you're doing or what the terms mean. Familiarize yourself with the types of stock trades you can make, how to pick stocks, and ways to uncover hidden fees. You can learn how to trade on margin or how to short stocks, as well as how to structure your trades to avoid huge tax hits.