How does a brokerage account work?
Why do I need a broker?
You may be wondering if you really need a brokerage account, especially if you are a newbie investor. How exactly does the brokerage account help you invest?
The answer lies in the mechanics of investing. Without a brokerage account, if you want to buy a certain number of shares in a company, you must somehow find another investor who wants to sell exactly that number of shares. Next, you will need to agree on a price. It’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 do business. By opening a brokerage account with a broker member of the main financial exchanges, you accept that your broker acts as your intermediary to carry out transactions.
It’s because of this relationship between you and your broker that you need to be very specific when telling your broker exactly how you want to invest.
There are many different order types you can use in your brokerage account that will get you the results you want:
- Market orders telling brokers to buy or sell at the best possible price. You definitely end up making the exchange, but you have no guarantee on the price of the exchange.
- Limit orders tell brokers to buy or sell at the limit price you specify in the order. So you know that if the trade goes through, you will get that price. But there’s no guarantee that your broker will find someone willing to take the other side of your trade.
- stop orders tell brokers to act only if the price of the investment reaches a certain level. For example, if you own a stock that is currently worth $25 and you place a stop loss order for $20, your broker will only sell your stock if the price drops to $20 or less.
- Fill or delete orders execute immediately or they are cancelled.
- Daily orders remain active all day until they are filled, and if not filled, they automatically cancel at the end of the day.
- well canceled orders remain in effect indefinitely, usually subject to a 60 or 90 day limit defined in your brokerage account agreement.
Are brokerage accounts safe?
Brokerage accounts are generally only as safe as the investments you hold there. If you make a bad investment that loses value, there is no protection to get your money back.
However, most brokers offer protection against issues involving the company itself. The Securities Investor Protection Corporation offers up to $500,000 of protection per account, including a cash limit of $250,000. If your brokerage firm fails, SIPC works to replace your missing investments up to these limits. Again, however, the SIPC offers no protection if your losses are due to the decline in value of your investments.
What to look for in a brokerage account
If you want the best brokerage account, it’s a good idea to research the features that are most important to you. Some things to look for in a brokerage are:
- Low costs. Look for brokers that charge no commission for trading stocks and ETFs and have little to no ancillary fees for things like account maintenance. Also look for reasonable commissions for mutual fund investments if you plan to go this route. This way, more of your hard-earned money will be used to increase the value of your investments.
- Appropriate minimum investments. If you are just starting out, you may not have a lot of money to invest. This is not a problem with most brokerages, but a few have a high minimum deposit requirement. If you don’t meet the requirements, these brokers charge low balance fees or prevent you from fully opening an account.
- Full range of account types. In addition to a regular investment account (also called a taxable brokerage account), you might benefit from having IRAs (traditional and Roth IRA account types), other types of retirement accounts, savings accounts -health and other tax-efficient specialty accounts. Many brokers offer these tax-advantaged accounts, but not all of them, so be sure to check before opening an account.
- Investment research. If you appreciate your broker providing research for your investment, either on their own or from third-party sources, check out the resources provided by a broker.
- Other financial services. It is increasingly common for brokerage firms to go beyond simple brokerage accounts to offer a wider range of financial services. For example, many brokers allow you to open a bank account to hold money, as well as access to ATMs, debit cards, and even loans. If having all your financial dealings with one company is important to you, make sure the broker you choose offers a full range of such services.
Find the right fit
The most important consideration in finding a brokerage account is whether you will be able to do all that you want with your investments in a way that works for you. The best brokers offer the support their clients need without being pushy, at a price that suits them. Fortunately, with so many financial providers offering brokerage accounts right now, you have a very good chance of finding the perfect match between what a broker has to offer and the needs you have to meet your financial and business goals. ‘investment.