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You don't need help from a human stockbroker to purchase stocks, but in most cases, you will need to work with a brokerage firm. Some brokerages provide strategic investment advice and will carry out trades on your behalf. Others simply offer a platform you can use to buy and sell stocks yourself or through an automated robo-advisor.
The right option for you depends on your personal investment style. If you're looking to invest in stocks, chances are you'll work with a brokerage at some point.
What Is a Brokerage Firm?
You can't simply walk into the New York Stock Exchange and put in a trade order. Instead, a brokerage firm serves as a bridge between you and the stock market. With a brokerage account, you can trade stocks, bonds and other securities. There are three main ways to do that:
- Full-service brokerages: A full-service brokerage can buy and sell stocks on your behalf, provide personalized investment advice and manage your investment portfolio. That includes setting up your asset allocation and rebalancing as necessary, though you'll likely pay a premium.
- Online investment brokerages: With an online brokerage, you can trade stocks on your own using a brokerage account. This might be a good option for seasoned investors who prefer being in the driver's seat. These platforms are also more cost-effective than working with a full-service brokerage.
- Robo-advisors: These online investment platforms are fully automated. After assessing your investment goals, age and risk tolerance, a robo-advisor will automatically create a portfolio for you. The platform will then buy and sell stocks on your behalf. Working with a robo-advisor is usually cheaper than using an online investment brokerage or full-service firm.
What Is a Broker?
A stockbroker is a licensed professional who works for a full-service brokerage firm. Sometimes called an investment advisor, they work directly with investors and may:
- Provide individualized financial advice
- Suggest investment strategies
- Manage your portfolio and make trades on your behalf
- Rebalance your portfolio
Stockbrokers might earn a commission per trade or charge an annual fee. If you have uninvested cash in your brokerage account, they may take a percentage of that instead. Personalized attention and extra support can be nice, but you don't need a stockbroker to invest in stocks. You could take a DIY approach with an online brokerage, or allow a robo-advisor to do the work for you.
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How to Find a Brokerage
- Decide which type of brokerage is right for you. If you're an experienced investor and just want access to the market, an online brokerage might be the best fit. Others might prefer a stockbroker or robo-advisor to handle the details for them. Ask yourself what you're looking for in a brokerage, then go from there.
- Compare brokerages. Shop around and compare your options. Fees, technology, educational resources and customer service can vary from one brokerage to the next. Also ask if uninvested cash in your brokerage account will be swept into an external account that earns interest.
- Choose a brokerage account. Cash brokerage accounts are linked to another bank account. You can simply transfer funds whenever you want to purchase stocks or other securities. With a margin account, you'll borrow money from the brokerage. Your portfolio assets then become collateral.
- Open a brokerage account. You'll need to provide basic financial information to open a brokerage account. The brokerage will likely ask additional questions about your risk tolerance, investment goals and liquidity needs to best serve you. Once your account is open, you can fund it and begin buying and selling stocks and other securities.
Investment Alternatives to Stocks
Buying and selling individual stocks can be risky and time-intensive. Mutual funds and exchange-traded funds (ETFs) offer an alternative way to invest in the stock market. They allow you to hold baskets of different stocks and other securities. ETFs trade like stocks and might track a market index. Mutual funds have a fund manager and typically charge higher fees. You can invest in mutual funds and ETFs through a brokerage. Both can help diversify your portfolio and spread out investment risk.
Individual retirement accounts (IRAs) are available through brokerages, but if you're contributing to an employer-sponsored 401(k), you don't need one. Your investments are managed by the plan administrator and may include target-date funds. These automatically rebalance to become more conservative as you approach retirement.
Some 401(k)s offer self-directed brokerage accounts. These allow employees to branch out from their plan's default settings and asset allocation—and invest in a wider selection of stocks and other assets.
While stocks are considered high-risk investments, bonds are on the other end of the spectrum. When you purchase a bond, you're lending money to the issuer. That can be a corporation, a local municipality or the federal government. They're obligated to repay the bond with interest. Bond returns typically lag behind stocks, but they can add some stability to your portfolio. Holding a mix of both can help you strike the right balance. Your asset allocation will likely shift as you age.
Real Estate Investment Trusts (REITs)
REITs offer an alternative way to invest in real estate. Instead of buying properties yourself, you invest in companies that own and operate them. That can include residential homes or commercial buildings. Lots of REITs are listed on major stock exchanges—and they're required to distribute 90% of their income to shareholders through dividend payments.
The Bottom Line
A brokerage account is one way to access the stock market. You can invest in individual stocks, ETFs, mutual funds, IRAs and more—and stockbrokers are known for providing personalized investment advice and portfolio management services. But it's also possible to buy stocks without a brokerage account. Investing in a 401(k) is a good example of this.
Investing in stocks and other securities is an important part of financial wellness—and so is your credit health. Paying down debt can help strengthen your credit score and free up more money to invest in your future. Check your credit score and credit report for free with Experian.