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. 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 key 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 the folks 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. Find out what fees to avoid, what services you may need, and how to protect yourself. It's part of our guide to investing in stocks.
What Is a Brokerage Account?
Before you can select a brokerage, make sure you know what exactly a brokerage account can do. These investment accounts let you trade securities, including stocks. But, they are subject to taxes and fees.
A brokerage account isn't limited in the amount of money you can deposit unless it is an IRA or 401(k). Those are special retirement accounts subject to federal regulations. You're also not limited in the number of brokerage accounts you can have—again except for IRAs and 401(k)s.
How Do I Choose a Stockbroker or Brokerage Account?
There are two types of stockbrokers: full-service and discount. Which you choose depends on whether you prefer a high level of service at a higher price or full control at a lower price. If neither sounds quite right, many firms offer a hybrid level of service that lands in between.
Another key factor in choosing an investment firm is how much cash you have on hand to invest. You might be priced out of the services of a firm if they require account minimums higher than you're able to fund. But, other firms offer a minimum investment as low as $1.
Look for services, perks, and tools that will help you improve your trades and make better choices. They might be worth the added expense.
What's So Special About Full-Service Brokers and Brokerage Firms?
Custom 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 might be worth it 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 its fees? Will they help you plan for retirement, advise you on tax strategies, or execute complicated trades? Can you trust their recommendations—do they have a history of good performance? After all, your 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.
Can I Buy Stocks Without a Stockbroker?
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 use 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.
What to Know About Brokerage Fees
Stockbrokers don't work for free. When you hire a brokerage firm to handle your trades, they'll charge you fees to cover their costs. 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 working on a tiered system. This is where you're charged a percentage that decreases the more you have invested with the firm.
Custodial fees are the price the bank charges for guarding 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 fee for holding them on your behalf.
Should You Consider an Asset Management Account?
Many stockbrokers and brokerage firms are doing away with the traditional brokerage account entirely. Instead, they offer what's called an asset management account. These are hybrid accounts that combine banking, brokerage, and insurance services to those who want to streamline their finances.
By consolidating your activity, you may be able to take advantage of services only offered to clients with higher account balances. You will also get to see all your financial activity in one place in your monthly statement. And you might earn higher interest by using the attached money market account instead of using a regular checking account.
There are still management fees if you use this system. Plus, you will need to be able to afford the minimum balance of $5,000 or more.
How to Read the Trade Confirmations From Your Broker
Whenever you buy or sell an investment through your brokerage account, you are going to receive a trade confirmation from your stockbroker. Knowing how to correctly read a trade confirmation will help you sniff out any errors and avoid pricey 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 so on. If any of this data appears to be in error, you must contact your broker right away for a correction.
What Does It Mean When Your Stocks Are Held in Street Name?
If you invest through a broker, firm, or bank, the odds are that your stocks, bonds, and other assets are held in a street name, not your own name. It simply means that the firm is holding your shares for you.
Your brokerage has a system in place to track what shares you own. This 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. It will 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 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. Learn as much as you can about the types of stock trades you can make, how to pick stocks, and 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.