Picking Your First Broker
September 09 2012| Filed Under » Brokers, Investing Basics, Investment, Students, Young Investors
Let's face it, you can't start investing if you don't have a brokerage account. As a young investor, selecting your ideal broker is often very different than it would be for older investors of the same experience level. Choosing a broker isn't all that different from choosing a stock - it requires a lot of careful contemplation, and not all brokers are right for all investors. In this article, we give you tips on how to choose a broker that won't leave you broke.
Things to Consider
Before you can choose a broker, you have to know who or what constitutes one. There are two types of brokers out there: those who deal directly with their clients (regular brokers), and those who act as intermediaries between the client and a larger broker (broker-resellers).
Regular brokers typically are considered more reputable than broker-resellers. That's not to say that all resellers are inherently bad, just that you need to check them out before you sign up with them. Regular brokers, like Scottrade, ShareBuilder and Fidelity, are members of recognized organizations such as the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation.
Breaking it down further, there are distinctions between full-service brokers and discount brokers. As the name suggests, full-service brokers offer many more services to investors than discount brokers do, but these services don't come cheap. With a full-service broker, much of the legwork is done by the broker, who provides the investor with more one-on-one advice as well as individualized suggestions and research.
That's not to say that discount brokers leave much to be desired in the customer service department. In fact, many discount brokers provide the option to solicit a broker for advice on a trade with your existing brokerage account. The caveat to remember is that when you do execute that trade, you'll pay considerably more (usually in execution fees) after consulting an actual broker than you would with a regular online trade .
For younger investors, discount brokers are probably the best bet. Some people recommend full-service brokers for new investors, but it's probably not financially feasible for a young person to go with a more expensive full-service broker. Besides, today's online discount brokers are widely used and typically provide a vast array of tools for inexperienced investors who aren't sure about their next steps. Plus, assuming you begin slowly, you'll learn a whole lot more about investing if you do some of the work yourself.
Trade execution fees are important, but there are other brokerage fees to consider, as well. If you're under 30, chances are you're limited by your budget. When it comes to investing at this age, looking at the fees that might apply to you is essential to ensuring that you make the most of your investment dollar. Here are some additional costs to consider:
Minimums
Most brokers have minimum balances for starting a brokerage account. Typically, this number ranges between $500 and $1,000 with an online discount broker .
Margin
While new investors might not want to open a margin account right away, it's something to think about for the future. Margin accounts usually have higher minimum balance requirements than standard brokerage accounts. It's also important to take a look at the interest that your broker charges when you make a trade on margin.
Withdrawal
It's your money, but sometimes it's hard to get it out of your account. That's because brokers sometimes charge fees to make a withdrawal, or they won't let you take any money out if it will drop your balance below the minimum. Some accounts allow you to write checks from them, but those typically require a much higher minimum balance. Make sure that you understand the rules involved in removing money from an account with your prospective broker.
Complicated Fee Structures
While most brokers have similar fee schedules, some brokers have complex fee structures that make it harder to sort out hidden fees. This is particularly common among broker resellers who may use fee structure as a selling point to entice clients. If you're looking at a broker that has an unusual fee structure, it's all the more important to make sure that the broker is legitimate, that it will look out for your best interests and that its fee structure will complement your investing style. If the rates seem too good to be true, be sure to read carefully over your account agreement and fee summaries, where additional fees are likely to be hidden.
What Kind of Investor Are You?
Your choice of broker should be influenced by the type of investor you are. No single broker is good for all investors, so determining your investment style before you start investing is usually a wise decision.
The Trader
Traders don't hold onto stocks for a long time. They're interested in quick and dirty gains based on short-term price volatility, and they make numerous trade executions over a short time span. If you envision yourself as a trader, you'll want to look for a broker with very low execution fees, as high trading fees could quickly eat up your returns. Also, don't forget that active trading takes experience, and the combination of a new inexperienced investor and frequent trading often results in negative returns.
The Buy-and-Hold Investor
A buy-and-hold investor, or passive investor, is someone who holds stocks for the long term. They're interested in letting the value of their positions appreciate over longer periods of time and reaping the benefits at a later date. If you fancy yourself a buy-and-hold investor, your main concern will be avoiding brokers with monthly fees. For a long-term investor, a slightly higher trade commission should be less of a concern.
While a buy-and-hold investor would do best with broker A, a trader could minimize his or her broker fees by going with broker B.
Additional Factors
Many investors will find that their investment style falls somewhere between an active trader and a buy-and-hold investor, in which case other factors will become important in picking the most appropriate broker. For instance, if you're a very young investor (a minor) you won't be able to open your own brokerage account. However, some brokers make it easy to set up custodial accounts and provide fee structures that are more appropriate for teenagers, making it possible for people to start investing at a younger age.
The Bottom Line
Eventually, there comes a time when you've got to make that decision and choose a broker. It's absolutely necessary to balance your needs as an investor and as a client - good customer service is essential, too. While your first broker won't necessarily be your broker for life, you have a much better chance of making money as an investor if you put the right amount of time and research into choosing a broker.
