A stockbroker is someone who buys and sells stocks and bonds on behalf of their clients. As a new investor, you may be wondering whether you need a stockbroker to start your wealth building journey.
In this article, we take a look at the types of stockbrokers available, the common types of investments, and the best kind of stockbroker to choose as a new investor.
TYPES OF STOCKBROKERS
There are two main types of stockbrokers and the kind you choose will depend on the level of service and advice you need and can afford.
Full service brokers – these are actual stockbrokers who work out of bricks and mortar premises, executing buy and sell orders for their clients, keeping up with the tax legislation and market performance, and providing financial and investment advice as required. They traditionally charge a commission for their service and, because of the cost involved, they are better suited for high net-worth investors.Online brokers – these are brokerage platforms and apps that facilitate buying and selling without human involvement and often employing algorithms. While they may offer educational material, they don’t typically provide real-time advice to customers. Because they either charge a low-account fee or no fee at all, this type of broker can be more attractive to a beginner with limited funds.
TYPES OF INVESTMENTS
There are a number of different types of investments available and a diverse portfolio would ideally contain some of each.
Bonds – These are low-risk / low-return investments which are effectively loans on which the issuer pays interest.Stocks – a stock is a share in a particular company. These shares are sold by a company to raise capital and once sold they can be traded amongst investors.Mutual funds – these are groups of stocks and bonds selected by a fund manager which pay regular dividends to investors depending on how well they perform.Index funds – these are funds that provide investment opportunities based on the performance of a particular index. They track the progress of the index automatically with no managerial involvement.Exchange-traded funds (ETF’s) – these are indexed funds which trade on an exchange like a stock. They can be purchased and sold at fluctuating prices throughout the day unlike index funds which are priced only once a day.Options – these are contracts to buy and sell a stock in a certain timeframe. These are options only and can either be used to buy the stock on the agreed date and at the agreed price or sold to other investors.Ethical investments – these are socially responsible investments which are selected on the basis of their sustainability and environmental friendliness, as well as their financial return.Crowdfunding – another type of investment growing in popularity is crowdfunding. This involves many people investing small amounts in new products or companies and receiving returns through equity, shares or interest payments.
HOW TO CHOOSE THE RIGHT BROKER FOR YOU
The best type of broker will be the one that best suits your investment needs. There are several common factors that you might want to consider. One of the most important of these is cost. If you don’t have a lot of money to invest initially, you might be better suited to a low cost form of brokerage such as an online platform or app. In this case you’d be looking for one that doesn’t charge commissions and charges only minimal account management fees.
Another factor when choosing a broker is how much investment experience you have. If it’s very little, and you can afford it, you might be better off using a full service broker who can help you select the best stocks and manage your portfolio for you. Another less expensive option would be to select a mutual fund where the stocks have already been pre-selected.
Additionally, while you may not have a lot of investment experience to begin with, you would presumably want to become more educated as time progresses. Therefore, choosing a broker which offers access to investment research and educational materials is important to help you make more informed decisions as your portfolio grows.
While everyone’s situation will be different, the majority of novice investors will not usually have a lot of money to play with, so many tend to gravitate to a lower cost brokerage option when they first start out. But, if you are prepared to do the research, devote the time that’s needed and follow professional advice when it’s available, there’s no reason why you can’t start small and build a solid portfolio without incurring high cost.
It pays to keep in mind that, as with any form of speculation, investing is all about the level of risk you are prepared to tolerate so if it’s money you can’t afford to lose or you don’t trust your own judgement, perhaps consider a lower risk form of brokerage such as full service once you can afford it.
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