What You Need to Know About Your Broker

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Fools with questions on finance -- or just about any other topic -- can often find prompt and helpful answers from the folks on our discussion boards. On our Investing Beginners discussion board, many new posters present questions ranging from picking the best stocks and funds to choosing a good brokerage firm.

We've compiled some common questions about finding the right broker for you, followed by our responses:

What are some things that I need to look out for when looking for a discount broker?
As we point out in our broker collection, the most important factors to consider will vary from person to person. If you have no interest in mutual funds, you won't care about fund-related charges at the brokerage. If you prefer going to a bricks-and-mortar building to deal with your portfolio, you'll want a brokerage with local branches, not an online-only enterprise.

We recommend making a list of what you value most in a brokerage, and comparing contenders on those counts. Think about which services you'd use the most, and see what they cost. (Our broker comparison table can help you see how you might construct your own comparison.)

Can a broker that invests in mutual funds invest in any fund family?
First, for those who don't know, a "fund family" is a company such as Fidelity or Vanguard or a host of others that offers several or many mutual funds. The answer here is no. We don't think there's any brokerage that offers funds from every single fund family out there. Many brokers, including Scottrade, TD AMERITRADE (Nasdaq: AMTD), E*TRADE Financial (Nasdaq: ETFC), and Sharebuilder, offer hundreds of funds without any fees.

But don't let the absence of a fund you're interested in be a dealbreaker for you, should you find an otherwise terrific brokerage. You can usually just buy into the fund from the fund company itself. (It might take a little longer, since you'll have to get necessary forms and send money.)

How do you figure out the entire cost of a trade? The ones I have seen say as low as $8-$10 but they also say you need to make 120 trades a year. What if you don't have 120 trades a year?
Many brokerages' trading commissions apply no matter how many trades you execute during the year. Others offer lower rates if you make more trades, and slightly higher ones if you only trade infrequently.

Full-service brokers used to charge commissions based on the amount you invested. That means you'd pay a higher commission to buy 100 shares of a high-price stock like Apple (Nasdaq: AAPL) or First Solar (Nasdaq: FSLR) than for stocks with lower share prices like Titanium Metals (NYSE: TIE), Citigroup (NYSE: C), and Micron Technologies (NYSE: MU). Now, though, you typically pay the same price regardless of how much the shares cost.

In some senses, then, the cost of the trade is the $4 or $10 or $25 that you spend to buy your stock. But it's also good to try to keep that to 2% or less than the value of the investment. If you're buying $500 of stock, a $25 commission would amount to 5% of its overall value -- a big bite. Invest $1,500, and the percentage of that $25 cost shrinks to 1.7%. With a $10 commission and a $500 investment, you're paying just 2%.

For more on broker-related issues, check out:

• Why you need a broker.
• Ten ways you can size up your broker.
• How to invest any amount of money.