Is it worth using a stock broker?
Is it worth getting a stock broker? You'll want to get a
Stock brokers can help you build a solid investing foundation — functioning as a teacher, advisor and investment analyst — and serve as a lifelong portfolio co-pilot as your skills and investing strategy mature.
In many cases, brokerage fees can be well worth it. For example, a robo-advisor can create a custom investment portfolio for a fee of 0.25%-0.40% per year, which is significantly less than you'll pay to a human advisor.
A growing number of investors like buying stocks without a broker because they're able to avoid possible conflicts of interest and save on broker fees. However, it's especially important to know what to buy if you're not using a broker.
Most investment accounts hold a small amount of cash, and a broker sweeps that cash into a deposit account that earns interest. A small portion of that interest is paid to the investor, and the brokerage firm pockets the rest. Brokers also sell trades to market makers, which earns them a small fee per trade.
Stock Brokerage Fee Breakdown
The standard commission for full-service brokers today is between 1% to 2% of a client's managed assets. For example, Tim wants to purchase 100 shares of Company A at $40 per share.
Although relatively rare, stockbroker firms do go out of business. Investors should select a stockbroker after due diligence, which includes ensuring that the broker offers SIPC protection (see the full list of SIPC members). Once you begin trading or buying investment products, ensure your records are in order.
It may seem like $100 isn't a lot of money to invest in the stock market. But over time, you can add to that total and grow your stake in a business. Investing even a small amount is a good way to at least get your feet wet and slowly gain some exposure to a stock without going all-in right away.
Downsides of a standard brokerage account
Since it's a taxable account, you'll have to pay taxes on earnings in your account, including capital gains and dividends.
Stock brokers buy, sell, and store securities on your behalf. Even if your broker collapses, your investments are still safe and get transferred to another broker. If a stock broker collapses and assets are missing, SIPC insurance covers up to $500,000 per customer.
When should a beginner buy stocks?
The best time to buy a stock is when an investor has done their research and due diligence, and decided that the investment fits their overall strategy. With that in mind, buying a stock when it is down may be a good idea – and better than buying a stock when it is high.
While you don't need much these days to start investing, the key is that you regularly contribute beyond your initial deposit so that you have more money to grow over time. But just how much of your income should go toward investing? The sweet spot, according to experts, seems to be 15% of your pretax income.
Brokerage accounts are taxable accounts
The act of opening a brokerage account doesn't mean you'll be on the hook for any additional taxes. But brokerage accounts are also called taxable accounts, because investment income within a brokerage account is subject to capital gains taxes.
- Fidelity Investments.
- Robinhood.
- E-Trade.
- Interactive Brokers.
- Merrill Edge.
- Ally Invest.
- Tastytrade.
- WellsTrade.
Expertise: Brokerage firms have professional investment advisors and traders who have experience in the markets and can provide valuable advice on investment strategies. If you are new to investing or are not confident in your ability to make investment decisions, working with a brokerage firm can be a good idea.
| Brokerage fee | Typical cost |
|---|---|
| Annual fees | $50 to $75 per year |
| Inactivity fees | May be assessed on a monthly, quarterly or yearly basis, totaling $50 to $200 a year or more |
| Research and data subscriptions | $1 to $30 per month |
| Trading platform fees | $50 to more than $200 per month |
Generally, brokerages make money by charging various fees and commissions on transactions they facilitate and services they provide. The online broker who offers free stock trades receives fees for other services, plus fees from the exchanges.
Online listed stock and ETF trades at Schwab are commission-free. Online options trades are $0.65 per contract. Service charges apply for automated phone trades ($5) and broker-assisted trades ($25) for stocks, ETFs, and Options. Futures trades are $2.25 per contract8 for both online and broker-assisted trades.
| Broker | Star Rating | Fractional Share Trading of Stocks |
|---|---|---|
| Fidelity Investments | 4.8 | Yes |
| Charles Schwab | 4.7 | Yes |
| Interactive Brokers | 4.6 | Yes |
| tastytrade | 4.5 | Yes |
Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm.
Who should not invest in stocks?
If you have debt, especially credit card debt, or really any other personal debt that has a higher interest rate. You should not invest, because you will get a better return by merely paying debt down due to the amount of interest that you're paying.
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
| Stock | Market Capitalization | Sector |
|---|---|---|
| Colgate-Palmolive Co. (CL) | $73 billion | Consumer staples |
| Sysco Corp. (SYY) | $41 billion | Consumer staples |
| Coca-Cola Co. (KO) | $261 billion | Consumer staples |
| S&P Global Inc. (SPGI) | $134 billion | Financials |
| If you invest $100 a month for this many years... | ...this is how much you'll end up with. |
|---|---|
| 10 | $21,037.40 |
| 15 | $41,939.68 |
| 20 | $75,603.00 |
| 25 | $129,818.12 |
The Bottom Line. For most people, the 401(k) is the better choice, even if the available investment options are less than ideal. For best results, you might stick with index funds that have low management fees.
