In order to buy stocks, you need the assistance of a stockbroker who is licensed to purchase securities on your behalf. However, before you make a decision on a stockbroker, you need to figure out what type of stockbroker is right for you.
There are four basic categories of stockbrokers available today, ranging from cheap and simple order-takers to the more expensive brokers who provide full-service, in-depth financial analysis, advice, and recommendations: online/discount brokers, discount brokers with assistance, full-service brokers or money managers.
Online/discount brokers are basically just order-takers and provide the least expensive way to start investing since there is typically no office to visit and no certified financial planners or advisors to assist you. The only interaction with an online broker is over the phone or via the Internet. Cost is usually based on a per-transaction or per-share basis, allowing you to open an account with relatively little money. An account with an online broker allows you to buy and sell stocks/options instantly with just a few clicks. Since these types of brokers provide absolutely no investment advice, stock tips or any type of investment recommendations, you're on your own. The only assistance you'll receive is technical support for the online trading system. However, online brokers typically offer investment-related website links, research, and resources, but these are usually third-party providers. If you feel you are knowledgeable enough to take on the responsibilities of directing your own investments, or if you want to learn how to invest without making a large financial commitment, this is the way to go.
Discount Brokers with Assistance
Discount brokers with assistance are basically the same as online brokers, with the difference being that they're likely to charge a very small account fee to pay for the extra assistance. This assistance, however, is usually nothing more than just providing a bit more information and resources to help you with your investing. They can be the same companies as your basic online/discount brokers that offer upgradeable accounts or services. However, they stop short of giving you any sort of investment advice or recommendations. For example, they may offer more in-house research and reports or publish investment newsletters with investment tips.
Full-service brokers are the traditional stockbrokers who take the time to sit down with you and know you both personally and financially. They look at factors such as marital status, lifestyle, personality, risk tolerance, age (time horizon), income, assets, debts and more. Full-service brokers then work with you to develop a financial plan best suited to your investment goals and objectives. They can also assist with estate planning, tax advice, retirement planning, budgeting and any other type of financial advice, hence the term "full service." They can help you manage all of your financial needs now and for the rest of your life, if need be. These types of brokers are for those who want everything in one package. In terms of fees, they are more expensive than discount brokers, but the value in having a professional financial advisor by your side can be well worth the additional costs—accounts usually can be set up with as little as $1,000.
Money managers are somewhat like financial advisors but may take full discretion over a client's account (hence the term "manager"). These highly skilled investment professionals usually handle very large portfolios of money, and, thus, charge hefty management fees based on the assets under management and not per transaction. They are basically for those with substantial incomes who would rather pay someone to fully manage their investments while they're out playing golf. Minimum account holdings can range from $100,000 to $250,000 or more.
Test Strategies Before Buying Real Stocks
For those keen to learn what stock trading is all about without spending hundreds or thousands of dollars, you can sign up for a free Investopedia Simulator account. It is a simulated online broker account for users, who are given US $100,000 in pretend money, to practice investing strategies or to simply learn how to trade stocks and options in real companies in the stock market. You should also sign up for our free Investing Basics newsletter to learn more about stock trading.
Once you have determined how stock trading works and what is most important to you in a broker, you can take the next step. Each broker's pricing, features, and platforms are different, so this step can be intimidating. If you have a difficult time choosing a broker, research the best online brokers or best discount brokers.
Joe Allaria, CFP®
CarsonAllaria Wealth Management, Glen Carbon, IL
You'll have to make a significant investment into learning and monitoring what goes on in the market. Before taking any action, I would recommend learning as much as you can on securities, perhaps by taking investment classes offered through an accredited program. Also, learn as much as you can about different investment philosophies.
Then do a test run: Pick some stocks and monitor their daily fluctuations, seeing how they affect your bottom line. If you can't handle the volatility, you need to create a new strategy – or consider hiring an advisor. Working with one, even temporarily, is a way to get a crash education in investing. The key is to gain the knowledge to be able to make informed decisions and never blindly to follow the next stock tip you see.