Published in: Buying Stocks | Dec. 18, 2018
By: Dan Caplinger
Find out what you need to know in order to invest better.
There are dozens of companies that offer brokerage accounts to potential customers. Many of them even offer lucrative rewards to open an account. But amid all the advertising and promotional material from these companies, it's easy to lose sight of exactly how a brokerage account works and why you should have one.
A brokerage account lets you buy and sell different types of investments. Most popular brokerage companies offer accounts that let you trade stocks, bonds, and exchange-traded funds. Some brokers add the ability to participate in other financial markets, such as foreign exchange, commodities, options, and even cutting-edge asset classes like cryptocurrencies.
Brokerage accounts come in two broad categories. Those who want to have a close personal connection with a financial advisor at their chosen brokerage company might prefer a full-service brokerage account, which usually includes the opportunity to consult with in-house experts to help you choose investments, do bigger-picture financial planning, manage the tax impacts of your investing, or just get a gut-check when an unexpected market downturn makes you nervous. However, the downside of full-service brokerage accounts is that they typically require you to pay expensive fees along the way, with some charging hefty commissions while others collect a certain percentage of your assets at regular intervals.
Online discount brokerage accounts, on the other hand, are more of a self-service option for investors. The fees that these accounts have are generally extremely low, largely because when it comes to making choices about your investments, you're more or less on your own. Some discount brokers do offer access to advisors or investment research, but you shouldn't expect the same level of commitment that a full-service broker could provide, because you're not paying as much with a discount brokerage account.
Find the best stock broker for you among these top picks. Whether you're looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you'll find a stock broker to fit your trading needs.
Already you might be wondering whether you really need a brokerage account. How exactly does the brokerage account help you invest?
The answer lies in the mechanics of investing. Without a brokerage account, if you wanted to buy a certain amount of stock in a company, then you'd have to somehow find another investor who happened to want to sell exactly the same number of shares of that same stock. Then, you'd have to agree on a price. That's a lot of work.
To make things easier, financial exchanges bring buyers and sellers together. But only members of a given exchange can use it to conduct business. By opening a brokerage account with a broker that's a member of the major financial exchanges, you agree to have your broker act as your intermediary in making trades.
It's because of this relationship between you and your broker that you have to be very precise when you tell your broker exactly how you want to invest. There are many different types of orders that you can use in your brokerage account that will get you the results you want:
Brokerage accounts are generally as safe as the investments that you hold in them. If you make a bad investment that loses value, there's no protection that will get you your money back.
However, most brokers do offer protection against problems involving the brokerage company itself. The Securities Investor Protection Corporation offers up to $500,000 in protection per account, including a $250,000 cash limit. If your brokerage firm fails, then the SIPC will work to replace your missing investments up to those limits. Again, though, the SIPC provides no protection if your losses are due to your investments falling in value.
If you want the best brokerage account you can find, it's smart to look for the characteristics that are most important for you. These include the following:
If you're just getting into the stock market, the first thing you'll need is a stock broker. Browse our pick list to find one that suits your needs -- as well as information on what you should be looking for.
The most important consideration in finding a brokerage account is whether you'll be able to do everything that you want with your investments in a way that's comfortable to you. The best brokers offer the support their customers need without being pushy about it, at a price that's right. Fortunately, with so many different financial providers offering brokerage accounts right now, you have a very good chance of finding the perfect fit between what a broker has to offer and the particular needs that you have toward reaching your financial and investing goals.
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