Navigating the stock market is no small task for any investor, beginner or expert. Though most stocks are common, choosing which stock to place shares in is anything but simple and calls for the experience of an advisor to guide you along the often confusing road of investing.
That’s where brokerage comes in. Brokerage firms are specialized types of financial institutions designed to help people in the buying and selling of stock shares. More specifically, a brokerage firm is like a middle man between the seller of a stock and its prospective buyer. “To ‘broker’ a deal,” explains wiseGEEK, “is to communicate with both the buyer and seller as to acceptable price on anything sold or purchased.” Think of it as similar to operating like an investment bank.
If you’re interested in retaining a brokerage firm, here’s a simple rundown of a few types of brokerage accounts you can choose from, plus information about retaining a broker.
What types of brokerage accounts are there? Brokerage 101 provides a comprehensive list:
Cash accounts. A simple, cash-in-full account that requires you, the investor (the brokerage firm’s client) to pay for the total amount of any investment security — or stock — you choose after consulting with your broker. Upon selling the securities, proceeds from the account become available to the investor to reinvest as they like.
Margin accounts. With a margin account, the investor is required to pay only for a portion of the security they’re purchasing. The remaining balance is borrowed from the brokerage firm, called a “margin loan.” Clients are expected to pay interest on this loan. As such, when closing their account, proceeds may go towards paying off the loan if it’s still active. But the real benefit of this type of account is the greater investment leverage than you’d find in a cash account.
Short accounts. Investors in a short account, according to Investopedia, borrow shares from other investors or brokerage firms. This could be risky because it requires you to return those shares in the future. This creates liability, but can also produce a great profit if the investment produces returns.
In 2012, the Wall Street Journal ranked some of its top brokerage firms in the nation, which included Fidelity, Charles Schwab, Merrill Edge and WellsTrade. What are some of the things you should look for, according to the WSJ survey, in a broker?
Then there’s online brokerage. “If you’re a new investor with limited funds, an online, no-frills brokerage account might be just the thing you need,” says Molly McCluskey of Daily Finance.
Going the online route, as with other brokerage firms, will cost some fees. They can start below $1,000, according to Daily Finance. Few of the best online brokerage firms, however, like E-Trade, Trade King or TD Ameritrade, will charge more than $2,500 to open an investment account.
One advantage of opting for online brokerage is the availability of mobile options. Much the same as you’ll find with a checking or savings account through your bank or credit union, brokerage firms are adopting more and more internet access points and smartphone apps, says Daily Finance. It offers a new level of connection with your stockbroker or financial advisor that can help you stay tapped in to the investments you make.
Stock brokerage can seem like a complex issue to tackle. If you’re serious about investing, it just takes some time and research to find out which direction you’d like to take your money. Like anything else personal finance related, examine your budget and look into a few brokers, and what they can offer. Soon, you’ll be able to find one that can meet your financial goals, and most of all, earn you the best investment you’ve been waiting for.