What do stock broker do ?

Discount brokers: Do-it-yourself stockbrokers

More and more investors are choosing to manage their portfolios on their own by using online discount brokers to minimize the cost of investing and maximize the choices available to them. The big advantage of an online discount broker is that they are downright cheap. Whereas a traditional broker-dealer might charge you $100 for a stock trade, virtually all discount brokers charge $7 or less for that basic service.

There are three things that define a discount brokerage service:

Low prices — A discount broker offers an inexpensive line straight to Wall Street. If you know you want to buy 100 shares of Apple or invest $10,000 into a mutual fund, there is often no cheaper way to do it than by using a discount broker. Most discount brokers charge a commission of less than $7 to buy or sell a stock. Old-school stockbrokers can charge commissions of $100 or more for the same trade.

No advice — A discount broker is unlikely to phone you up about a hot stock tip, or tell you which funds you should invest in. Instead, discount brokers offer research on stocks and funds from independent research firms to their clients. For example, if you have a Fidelity brokerage account, you get access to research reports from several different research houses, which you can use to make an informed decision on whether to buy or sell a stock.

No (or few) humans — Discount brokers are designed to be used electronically and actively discourage their clients from talking to a human for a service. For example, many brokers charge you $7 or less to place a trade online through your account. However, if you phone up your broker to make the trade — something very few people ever do — the commission might be as high as $30 or $50.

Even as a discount brokerage customer and a proponent of DIY investing, I’m willing to admit they aren’t for everyone. Many people prefer a real human to help craft a retirement plan and build a thoughtful investment portfolio for them.

Guidance from a broker-dealer or RIA can be especially helpful for people who have complicated financial lives — multiple business interests, large amounts of money, complicated trusts to pass wealth on to family members, and so on. Those complexities make it easier to justify hiring the services of a full-service brokerage or RIA.

But for the average person who just wants to open an IRA to start saving for retirement, a discount broker is hard to beat, especially for people who are just getting started. Whereas most RIAs have six-figure minimums to hire their services, discount brokers allow you to get started with as little as $1. If you’re thinking of starting to invest, check out our resources on the best online stock brokers for beginners to learn which may be best for you.

Naturally, many people start saving with a discount broker in their younger years, and later, if they want personalized help as they near retirement, they move to an RIA or other full-service financial planner. For obvious reasons, it doesn’t make sense to hire an expert for $250 an hour if you only have $5,000 to invest. On small amounts of money, minimizing expenses is arguably the most important thing you can do to improve your investment performance.

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