Investing With A Broker: How to Get Started,
Investing on the stock exchange can be a real challenge. Whether your objective is to trade daily or to save for retirement, you will probably need the help of an investment professional to manage transactions or to help you set a diversified portfolio of stocks, bonds and ETFs. Those are the roles of brokerage firms.
What is a Brokerage Firm?
A brokerage firm or simply broker is a financial institution that helps people and institutions buy and sell financial securities on the market.
So if you want to buy 100 stocks of Google you will have to go through a stockbroker. There are two types of brokerage firms: Traditional or full-service brokerage firms and discount brokers.
The first generally offer complementary services in addition to carrying trades, like investment advice, market research, and margin loans.
A discount or online brokerage firm provides computerized and automated platforms to execute trades, generally at a smaller commission fee.
Because discount brokers are cheaper, you usually don’t get assistance from a stockbroker and you are left on your own to set up an investment strategy.
How to choose a broker?
You have to find the broker that is right for you. The choice between a discount broker and a full-service broker is up to you and depends on your needs.
The following questions will help you identify which option is best for you:
1. What is your starting budget? Brokers require a minimum deposit in your brokerage account. That amount can be as low as $1 and as high as $10,000.
2. What is your investment knowledge? Would you be confident trading on your own or do you need guidance and financial advice?
Note that some online brokers offer broker-assisted services and educational tools to help you in your investment decisions.
3. Do you prefer dealing with a small shop or an established company? Make sure you do your research before transacting with an institution you trust.
4. How much are you willing to pay per transaction? Remember, the higher the fees and commissions, the less profit in your pocket.
A full-service broker can charge up to $200 per trade, whereas a discount broker like Virtual Brokers can charge as low as $5 per trade. You also have to pay attention to maintenance, inactivity, and operating fees.
How to Open Your First Brokerage Account
Once you have decided which brokerage firm is right for you the next step is to open your account.
For that purpose, you may have to fill an investor profile questionnaire, fill some forms to setup the account, provide personal information, and choose the types of services you want.
There may be extra requirements for investors working for financial institutions in order to limit insider trading risk.
Final advice before you jump
Here are some pieces of advice you should not before you begin investing with a broker.
1. Before you get started, read how to invest your money.
2. Make a budget and have some money in a savings account for unforeseen challenges.
3. Know how much risk you are willing to take. For example, stocks have traditionally earned more return than bonds but they are also more volatile.
So you may want to mix your portfolio with risky and conservative instruments.
4. Learn the basics of portfolio diversification and avoid putting your eggs in the same basket. It is usually a good idea to invest in assets whose performances are negatively correlated.
5. Do your research before signing on with an investment firm. You will want to know what the fee structure is, what is their reputation, read customer feedback, and reviews on the tools and platforms provided to clients.
6. Realize that the predictions of the most experienced investment analysts may not come true. The market changes all the time.
7. Do communicate regularly with your brokerage firm. If you have questions, be sure to ask them and get the answers you need.
8. Keep yourself up-to-date with current economic and political events worldwide. Understanding economic indicators can also be very helpful.
There are a lot of things you have to know in order to be an effective investor. A brokerage firm can help you understand asset categories and which ones are the best fit for your investment strategy.
About The Author
Meinna Gwet works as a Chief Risk Analyst at the National Bank of Canada. Her specialty is in enterprise risk management for banks and insurance companies.