If you’re new to investing and you’re just now planning to put some money in the stock market, you’re in luck. For the first time in history, virtually anyone can start investing for free, no matter how little money or knowledge they have.
Until fairly recently, even the most bare-bones discount online brokers charged profit-snatching per-trade commissions — and those commissions were rarely discounted for anyone who wanted to trade in real time. Even that was a huge step up from the old days when a call from a stockbroker was a status symbol reserved for people who could afford to pay a broker’s fees and still have money left over to invest.
Thankfully for the common investor, those days are over, but one thing hasn’t changed. In all but a few circumstances, the only way to invest in the stock market is through a stockbroker — although today, there’s no need ever to talk to one if you don’t want to pay for the privilege.
Here’s what you need to know about stockbrokers.
Stockbrokers Are the Gatekeepers of the Market
It is possible to acquire stock without a broker through fairly obscure channels like dividend reinvestment plans and direct stock purchases. But if average investors want to turn the money in their savings accounts into ownership shares in publicly traded companies, they’ll need a licensed stockbroker to make those transactions on their behalf.
Stockbrokers have to pass an exam called the Series 7 before they can earn the necessary license. Once they do, they’re qualified to buy and sell securities like stocks on behalf of their clients — that’s you — through exchanges like the Nasdaq composite and the New York Stock Exchange.
What a Stockbroker Can and Can’t Do
A Series 7 license qualifies stockbrokers to trade not only stocks but also:
A Series 7 license does not qualify them to broker trades in:
Stockbrokers Are Salespeople Who Can Also Advise
The Series 7 is a comprehensive exam that covers things like retirement plans, taxation, investment fundamentals, options, packaged securities, equity and debt instruments and much more. Those who pass it have demonstrated a broad knowledge base and are allowed by law to advise their clients. Just like in the old days before online investing, many people today still check in with their broker from time to time, ask for advice and bounce ideas off them, just as lots of brokers still call their clients with tips and opportunities.
That’s called a full-service brokerage account — more on that in a moment. It’s important to understand first that full-service or not, brokers are paid on a commission basis and do not have a fiduciary obligation to their clients the way registered financial advisors do. They are not necessarily unscrupulous, but they are salespeople who are hired by financial firms and investment banks to sell securities. They have an inherent conflict of interest. They get paid only when you buy.
On June 30, 2020, new regulations went into effect that tightened the rules regarding conflicts of interest and the kinds of information that brokers must disclose to their clients. Its proponents say it gives investors much more protection. Its detractors say it doesn’t go far enough. Either way, stockbrokers can and do give financial advice, but they are not financial advisors.
Full-Service vs. Discount Brokers
You must have a brokerage account to buy and sell stocks, but your experience — and its impact on your wallet — will be much different depending on if you choose a full-service broker or a discount broker.
Full-Service Brokerages Are Expensive but Helpful
First and foremost, full-service brokerage accounts are for people who have enough money to justify the expense. Not only do they charge per-trade commissions, but they’re much more likely than discount brokers to charge fees for things like balance minimums and account maintenance. If a person has $100 to contribute after all the bills are paid every month, it’s hard to justify paying $20 per trade to make that investment.
The tradeoff is guidance and shared knowledge. Full-service brokers help clients work toward strategies and are available to answer questions, offer guidance and to reach out with opportunities.
Discount Brokers Execute Trades — and Little Else
Today’s discount brokers actually have to be free — or really close to it — in order to compete. It’s an automated experience meant for self-directed investors. They’re the right choice for people who like to pick their own stocks or who are throwing X amount of their paycheck at something like an index fund ETF every month. Most come with at least rudimentary education, news and research tools, but a stockbroker will never call with a hot tip.
Some of the best free platforms, like M1 Finance and Firstrade, are purely no-cost discount brokers. Many of the big investment firms, like Fidelity and Schwab, now offer the choice of both full-service and free brokerage accounts.
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Last updated: May 18, 2021
This article originally appeared on GOBankingRates.com: New to Investing? Here’s Everything You Need To Know About Stockbrokers