In this article:
A brokerage firm acts as a middleman between you and the stock market. They can help you purchase a variety of investments, including stocks, bonds and other securities. Some brokerage firms also offer personalized investment advice and portfolio management. Brokers represent one way to invest, but it's not the only way. Let's unpack how it works, how to find a broker and some alternatives if you want to invest without one.
What Is a Broker?
The term "broker" can refer to any of the following:
- Individual stockbrokers: These are licensed professionals who work directly with investors. You'll find them at full-service brokerage firms, which usually exist online and at brick-and-mortar locations. Stockbrokers typically offer investment guidance and resources, and they can buy and sell securities on your behalf. They may earn a commission on each trade, take a cut of your uninvested cash or charge fees.
- Online investment brokerages: These platforms allow you to trade securities on your own through a brokerage account, or a broker may do it on your behalf. They generally charge a fee for every trade, but it's cheaper than working with a full-service brokerage firm.
- Robo-advisors: These are online platforms that use algorithms to buy and sell securities on your behalf. Robo-advisors automate investing and provide a hands-off experience. The algorithm uses your age, risk tolerance, financial goals and other metrics to create and manage your portfolio for you. It can be the most cost-effective way to invest, but don't expect much human involvement.
Types of Investments a Broker Can Help You Buy
Public companies sell stock shares to generate capital. They're available on major stock exchanges like the Nasdaq and the New York Stock Exchange. When you purchase a stock, you receive an ownership stake in the company that issued it. The goal is to sell your shares for more than you paid, and to net a profit after covering your tax liability. From 1996 to 2022, annualized total returns for the S&P 500 were 9%, according to McKinsey & Company.
You can add stocks to your portfolio through a broker. Keep in mind that individual stock picking is risky. It's nearly impossible to accurately predict which stocks will take off—and when to buy and sell.
Bonds are debt securities that are issued by the federal government, municipalities and corporations. They are essentially loans—and the organization that issued the bond is expected to repay you, with interest. Bonds are considered low-risk investments. While stocks offer the opportunity for growth, bonds can provide your portfolio with stability and steady income. From 1926 to 2019, average annualized returns for bonds were 5.3%, according to Vanguard.
Diversification involves holding a mix of high- and low-risk securities. One rule of thumb is to hold 60% stocks and 40% bonds. The right asset allocation for you will depend on your risk tolerance, age and financial goals.
Individual Retirement Accounts (IRAs)
IRAs are tax-advantaged retirement accounts that can be used to invest in a variety of assets. There are two main types:
- Traditional IRAs: Contributions may be tax-deductible, but distributions you take in retirement count as taxable income. Tapping your funds before age 59½ usually results in a 10% early withdrawal penalty. You must begin taking required minimum distributions (RMDs) beginning at age 73.
- Roth IRAs: Money you put in is not tax-deductible, but you can withdraw your contributions tax- and penalty-free if you've had the account for at least five years. (You may be taxed for withdrawing gains if you're younger than 59½.) In 2023, you can contribute up to $6,500 across all your IRAs (or $7,500 if you're 50 or older).
Exchange-Traded Funds (ETFs)
ETFs offer another way to invest through a broker. These funds, which may track a specific market index or industry, consist of a variety of different securities. Instead of buying individual stocks or bonds, you can invest in hundreds of assets in one fell swoop. That provides immediate diversification and can help mitigate investment risk.
Mutual funds are often actively managed by a fund manager. They pool money from investors, and then buy and sell securities on behalf of the fund. The goal is to outperform the market, though returns are never guaranteed. Like ETFs, mutual funds provide diversification and allow you to hold a variety of assets. They typically charge higher fees than ETFs.
Browse Top Brokerages
How to Choose a Broker
- Decide what you're looking for in a broker. Think about the level of involvement you want from a broker. You might prefer personalized investment advice and portfolio management, or an automated platform that will make investment choices on your behalf.
- Compare brokers. Once you've decided on the type of broker you want, shop around to find the right one for you. Be sure to compare fees, account features, investor resources, deposit requirements and investment options.
- Open a brokerage account. Most allow you to apply online. From there, you can fund your account and get started. You can make trades yourself with an online brokerage, or work with a stockbroker or robo-advisor to do it for you.
Other Ways to Invest
You can still invest without buying stocks, bonds or mutual funds. Here are some other options:
These workplace retirement accounts don't require a broker. Your 401(k) contributions are typically made through automatic payroll deductions. You might also have access to an employer match. These accounts are usually set up as target-date funds that automatically become more conservative as you get closer to retirement. You can contact your plan administrator to better understand your 401(k) investment options and asset allocation.
Buying an investment property is one way to invest in real estate. You might choose to rent it out or fix and flip it—both have their own costs and risks. These properties typically require a large upfront investment, and returns are never guaranteed. If you work with a broker, you can invest in real estate investment trusts (REITs). These are companies that invest in income-producing properties. It's considered a lower-risk way to invest in real estate.
You can buy and sell cryptocurrency like Bitcoin through online exchanges—no broker necessary. However, crypto investing is extremely volatile. Values can swing wildly with little warning. That means you could experience big gains or major losses. It drives home the importance of keeping your portfolio well diversified.
The Bottom Line
You can invest in a variety of securities through a broker. That includes stocks, bonds, IRAs, ETFs and mutual funds. You can also invest without a broker—or blend both strategies. As the investor, you get to decide. If you do work with a broker, the level of support you receive can vary and may include financial advice and portfolio management.
While you tend to your investments, Experian can help you manage your credit health. Our free credit monitoring tool will scan your credit report for new information, then alert you anytime something new pops up.