by Jordan Wathen | Nov. 20, 2018
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Many investors are turning to self-directed brokerage accounts to put all of their investment decisions in their own hands. Self-directed brokerage accounts enable you to pick and choose from virtually every investment option under the sun, from funds to individual stocks.
Below, I'll explain the advantages of self-directed brokerage accounts, why people use them, and how you can open your own self-directed account.
In simple terms, a self-directed brokerage account is one in which you have complete control over how you invest your money. That means you aren't locked into a narrow selection of funds picked by a financial advisor or your employer. Instead, you can buy individual stocks, bonds, options, and even dabble in orange juice futures, if you wanted to.
When you contrast a self-directed brokerage account to a traditional retirement account like a 401(k), the difference becomes quite clear. Most 401(k)s only offer a limited selection of mutual funds approved by the 401(k) administrator. A study by employee benefits firm BrightScope found that the average 401(k) offered 22 different mutual funds to invest in.
In other words, of the more than 9,000 mutual funds in existence, your 401(k) is likely to offer access to less than 1% of them. And forget about buying individual stocks or bonds -- most 401(k) plans simply don't allow you to do that.
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By contrast, a self-directed brokerage account gives you far more flexibility. If you open an account with an online discount broker, you'll be able to invest in thousands of different funds, buy or sell individual stocks and bonds, and dabble in options, if you desire. In short, a self-directed brokerage account is a path straight to the financial markets, enabling you to invest in more than just a pre-selected bundle of funds or stocks.
Being a self-directed investor has its advantages, as it allows you to take more control over your money. More control begets three main benefits over a limited investment account.
A self-directed brokerage account is mostly a descriptive label. It tells you that the investor, not an adviser or employer, has control over the investment decisions, and which investments are available at any given time. There are three types of accounts that are commonly used for self-directed investing.
Since the whole point of a self-directed brokerage account is to invest your money as you see fit, you don't need to pay for the handholding of a full-service brokerage firm. Full-service brokerage firms offer more advice and customer service, but the costs are high -- some full-service firms can charge you to $250 or more just to trade a small block of stock.
Online discount brokers are often the best bet for investors who want to take control of their own accounts. Discount brokers charge commissions ranging from just $5 to $7 per stock trade, and offer hundreds (in some cases, thousands) of mutual funds and exchange-traded funds you can buy and sell without paying a commission.
Some of the most popular online discount brokers appear in the table below.
|TD Ameritrade||Large research selection for stocks and funds, plus an active trader platform|
|Ally Invest||Low commissions and a $0 minimum investment|
|Fidelity||Top-tier research and low commissions, plus a wide selection of commission-free funds|
|Merrill Edge||Low commission plus special deals for Bank of America customers|
|Charles Schwab||Low commissions and some of the lowest fees on ETFs|
|E*TRADE||Platforms designed for active traders, with thousands of funds for long-term investors|
You can read more about each broker listed above in our complete review. Note that most brokers offer special deals (free trades and cash bonuses) for opening a new IRA or basic brokerage account. These offers are worth checking out, since they can substantially reduce your trading costs.
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There are a few things worth exploring more carefully when picking a broker:
In contrast to other types of investment accounts, a self-directed brokerage account is limited only by what the brokerage makes available to you. For investors who want to buy individual stocks, there is little difference between brokerages, as all of them will at least allow you to trade every stock in the United States.
Mutual fund investors may want to be a little choosier, though, since funds from certain asset managers (Vanguard, Fidelity, Capital Group, Schwab, etc.) may not be available through every single brokerage firm.
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