Published in: Buying Stocks | Oct. 17, 2018
Why Do I Need a Stock Broker?
By: Dan Caplinger
Your investing success could depend on it.
Image source: Getty Images.
Most investors understand that buying the best stocks in the market can bring them great financial success. But in an industry where there are so many different investments available, it's not always clear why you really need to invest in a brokerage account through a stock broker.
If you're satisfied with either earning average returns or allowing professional investors to take your money and invest it on your behalf, then you don't actually need to open a brokerage account. But if you're interested in the much better returns that you can earn if you identify and invest in the most promising companies you can find, then you'll want to start a business relationship with a good stock broker as soon as you can.
The three main investing alternatives to brokerage accounts
Rather than starting with the reasons why you need a stock broker, it's actually easier to look at situations in which you don't need a brokerage account. If you want to invest, you need some way of getting access to the investments that will help you reach your financial goals. There are a limited number of ways to achieve that goal.
The first place where most people stash their spare money is in a bank account. Checking accounts typically pay next to nothing in terms of interest, but you can find savings accounts or certificates of deposit that will give you at least some return. But the problem with relying on bank accounts for the money you want to invest is that the rates of interest you'll receive will never come close to matching what the stock market has given investors historically. And you'll never find an investment offered by a bank's traditional banking business that's designed to give you true stock market exposure.
A much more reasonable way to invest that doesn't involve a stock broker is through mutual funds. These investments involve multiple investors pooling together their savings into a single investment vehicle, with a manager that takes all of the money and invests it according to a specific objective. You can find mutual funds that specialize in all sorts of investments, including stock mutual funds that concentrate solely or primarily on stocks.
Mutual funds fall into one of two main categories based on how they choose their investments. Index funds are designed to track an outside index of investments, often simply by buying all the stocks that make up the benchmark in question. For instance, an S&P 500 index mutual fund usually owns all 500 stocks of the companies in the S&P 500, in the same proportions that the managers of the index use to calculate the S&P 500 every day. Index funds tend to have low costs, which enables their shareholders to come very close to matching the performance of the index that they track. However, index funds aren't designed to give investors any opportunity to outperform that index. So if you want market-beating returns, index funds will never be able to deliver.
Actively managed mutual funds are different. These funds employ professional investors whose job it is to find the best available investments. These professionals cost more than the managers who simply track an index, so your total expenses from investing in an active mutual fund will often be substantially higher than what an index fund charges. If the pros are successful in delivering market-beating returns, then you can end up ahead. Unfortunately, more often than not, that doesn't happen, and active mutual fund investors earn worse returns than they would have with an index fund.
Finally, the last common alternative to a stock broker is to hire someone to invest your assets in a separately managed account. These services look a lot like an active mutual fund, except that your money isn't pooled together with anyone else's. You can have a portfolio customized to your own particular needs. The downsides of separately managed accounts are that they're often expensive, and they usually require substantial amounts of money to invest before an account manager will be willing to take on the account.
Why the right stock broker can be better than all the alternatives
Opening your own brokerage account with a stock broker requires a choice that's a lot different from using bank accounts, mutual funds, or separately managed accounts. Fundamentally, the key reason why a stock broker can be the gateway to life-changing wealth is because you're the one who takes full control of your investment portfolio when you open a brokerage account. You don't have a banking institution, a mutual fund manager, or an investment professional pulling the strings and trying to find the best way to invest your money. You're the one with the responsibility for making that happen, and while a good stock broker will give you the tools you need to improve your chances of eventual success, the effort that you put in is most important in determining your long-term results.
In particular, here are just some of the many advantages that having your own brokerage account with a stock broker can be valuable:
- You can buy or sell any stock that's available in the stock markets to which your broker has access. That will almost always include every company listed on the New York Stock Exchange or Nasdaq Stock Market.
- Increasingly, brokers can also give you direct access to foreign stock exchanges as well. That can give you the ability to invest internationally in ways that let you call all the shots in terms of stock selection and risk management.
- Many stock brokers recognize the value of offering other sorts of investments, including bonds, mutual funds, and even bank account products. Top stock brokers can therefore give you a one-stop shopping environment to take care of all your financial needs, letting you simplify your money management rather than having various accounts spread among many different financial institutions.
- Stock brokers also have access to valuable research resources that clients can tap into in order to get more insight on the investments that they're interested in. These tools give you the ability to weigh different opinions and then choose the ones that are most compelling to you.
- You'll often find that stock brokers are also willing to give you broader financial advice that goes beyond simple investing. One way that different brokerage companies try to distinguish themselves from their competitors is through their customer service, so you can often find resources in related areas that range from budgeting tools and mortgage calculators to estate planning.
The ideal stock broker has a combination of attractive features. Fees a broker charges for stock trade commissions and other account expenses should be low. Your broker should give you all the account features you want, whether it's research, other types of financial accounts, or the ability to get advice from an investment professional from time to time. You should be able to open various types of accounts with your broker, including tax-favored retirement accounts like IRAs as well as regular taxable brokerage accounts. Which items are most important to you may vary, but figuring out what you want will help you identify which broker is best for you.
Don't throw away your shot
The most valuable asset you have with investing is time. Every month you wait to get started by opening a brokerage account and starting to invest is one month less that you'll earn the long-term returns that add up over time and transform even modest amounts of money into true wealth. By looking for a stock broker that best meets your own personal and financial needs, you'll be in the best possible position to achieve all of your financial dreams.
Using the wrong broker could cost you serious money
Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.