Finding a broker is crucial to gaining access to the markets. Brokers vary in regards to the variety of stocks you can choose from as well as the transaction fees they charge for buying and selling stock. In this article, we will cover broker tips and some of the broker advice, that will cover some of the concerns people have with selecting a broker.
If you already have a broker congratulations but you might want to take a look and compare their transaction fees from time to time, just to see if you can get a better deal on buying and selling stock. This does not mean you necessarily have to sell everything and move all your money over from one broker to another. Most brokers offer a transfer of funds from one broker account to another. So if you find a better broker than you already have, look into their transfer options before selling any of your assets in your present broker account.
The main concern with brokers is finding one that has low fees and has the stocks or mutual funds you are looking to invest in. The lower the fees the better because this will save you a few extra dollars that can be utilized for investing in stocks instead of it going to the brokerage company to pay for expenses etc.
What are some of the brokers to choose from?
Below is a list of some of the more common brokers that you can choose from. We will break them down by reviews in later posts but for now, here they are!
- Options House
- TD Ameritrade
- Interactive Brokers
- Fidelity Investments
- Merrill Edge
- Options Express
- Sharebuilder/Capital One Investing
These are just a few that you can choose from and these brokers are rated as the best brokers by other broker rating agencies as the lowest cost or have the best offers available to investors.
Broker recommendations explained
Before you select your broker and get your account set up make sure that you look at what the brokers offer for starter accounts. Sometimetimes you can get FREE money from the brokers. For instance, when we set up our investing account when we first started investing, the broker offered additional money if we invested a specific amount or moved a specific amount of funds over from a different account as seen in the picture below.
If you can take advantage of the FREE money, then by all means please do so because this will kick start your investing and building wealth in your account into overdrive. Another thing that you can do right away is to decide what type of account you want to set up. You usually have the option of going with a personal account or setting up a retirement account such as a Roth 401K, Roth IRA or Traditional IRA.
The accounts are geared towards what type of personality you have as an investor. Remember the first thing you want to do before investing is to figure out what your risk tolerance is and if you are more of an active investor or passive/defensive investor. Knowing which of the two types of investor you are will help a great deal in making a decision with which type of account you want to set up. Below is a correlation of the type of account you would want to set up based on your personality type.
Broker account correlation with the investor types:
Active Investors – Personal Account – Used by people who are day trading or actively selling and buying stocks. People who want to possibly have access to cash or dividends within a couple of days.
Passive Investor/Defensive Investor – Roth 401K, Roth IRA or Traditional IRA Accounts – Used by people who are more conservative and can’t watch their investments as often. People who want to shelter investments from taxes for the purpose of retiring or staying in the markets for a long period of time.
How does a broker work?
This is a more technical topic because brokers can work in various ways. Most retail investors are probably not concerned with the “behind the scenes” of how it all works, with brokers having access to various assets on the markets. This segment is a little more tailored towards day traders because of the high frequency of buying and selling stocks however as a retail investor, it is still useful information to equip yourself with before buying or selling a stock.
It is typical for most brokers to trade through a market maker which is a company that is ready to buy and sell a stock and is constantly updating their quoted price to do either. These companies or market makers, only deal directly with institutions and stock brokers and NOT with the public. Depending on how your broker is set up, your broker either will trade directly through the market maker or they may trade with another local stock broker who then trades with the market maker. The market maker could be located within your country or outside your country. For example, There might be a market maker in Europe that sells or buys American stocks with Europe-based brokers. This means that the trades never go anywhere near the New York Stock Exchange in New York. This might NOT mean much to the average investor but if you are a day trader, it makes a huge difference in the pricing of the asset at the time the trader buys or sells the stock.
The process is often called a (spread) which is the actual price you pay, based on the time you buy or sell and how fast the order is completed. Obviously, the more hands the order has to go through, the more time it takes to actually complete the order. The more hands the order goes through the more the costs associated with the transaction go up as well as a change in the actual price in which the investor actually gets to sell or buy the asset. All of this affects either the return on a sell order or the costs associated with a buy order, so this is just another important aspect of brokers to look into, especially if you will be making a lot of trades.
Broker versus direct investing with companies.
Knowing what you want from your broker will help guide you in making the proper selection of a broker and help with your investment plan when it comes to taxes and costs. If you are having a hard time deciding what broker to go with or want an alternative choice to a broker, you can also directly invest with companies that offer direct investing.
What is direct investing? Direct investing can be done through a companies website if they OFFER this as a choice for shareholders. There are some companies that will give an investor access to buying stock through their company website and sometimes there are no costs associated with buying or selling the stock up front depending on the company. Sometimes the FEES will be taken from the account only if you sell, again this may vary depending on the company.
NOTE: We have done this with one company we have been investing with and it has made the difference in savings, of around $115.00 over the course of a year and half of buying shares directly through the company as opposed to buying them through a broker.
So if you are someone is all about saving money and NOT paying transaction fees this might be something you would want to do some research on if you are thinking about maybe doing some growth investing or dividend investing with a specific company.
If there are other topics you would like us to cover on brokers please feel free to leave comments in the comments section below and we will look into it for you.