A:

Understanding the costs associated with becoming a casual investor is important if you want to be successful. It is important to realize that there are tangible costs, such as commission and funding an account. Also, don't forget about the hidden costs, such as the time and effort. For most beginners, the first major obstacle to becoming a casual investor is the amount it takes to fund a trading account. There is no magic amount that is needed and this will vary depending on your personal situation.

Commission is the second cost, and probably the most important that must be understood before becoming a casual investor. It is important to choose the appropriate type of broker for your investing style. A full-service broker offers clients access to its research and are often willing to give clients advice based on their risk profiles. With this high level of service comes a higher commission fee. For traders who are looking to hold a position for the long run and don't want to get into the analysis on their own, a full-service broker may be the best decision.

On the other hand, a discount brokerage offers clients the ability to buy and sell various securities, but does not offer any form of advice. Cutting out the research is why these types of brokers are able to offer lower commission rates. In most cases, a casual investor who does not have a lot of starting capital will choose this type of broker because the commissions have less influence on positions. However, doing your own due diligence is very time consuming, and can be very stressful when the wrong decisions are made. These are costs that must be measured and for some people, this warrants a full-service broker.

For more on this topic, see Picking Your First Broker and The Successful Investment Journey.

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