For those trying to grow their money, investing in the stock market is usually alluring. But there are many things to consider before jumping in — chief among them, stockbroker commissions. The average stockbroker fee can make a full-service approach a costly one.
Before delving into how much stockbrokers typically charge for their services, it’s worth understanding the role they play in an individual’s investment strategy.
Related: 6 real questions about investing— answered
What Does a Stockbroker Do?
For people looking to invest in the market, using a stockbroker — a person or a firm — is fairly common. Buying stocks isn’t like making most other purchases because the channels through which stock shares are sold are fairly controlled. While an individual buying, say, a computer could choose to purchase directly from a manufacturer, a store or other public marketplaces like Facebook or Craigslist, or from a friend, the channels for buying stocks are much more limited.
Though there are some instances when someone may buy stocks without a broker, generally, such purchases are required to flow through a stockbroker (exceptions including buying and selling through direct stock plans and dividend reinvestment plans).
A stockbroker has a license that allows trading of registered securities, meaning the ability to buy and sell stocks on behalf of clients. Even those who consider themselves DIY investors still need to manage their investments via a broker. But merely acting as an agent for buying and selling stocks doesn’t capture the full extent of what some brokers do.
Because the types of services a stockbroker may offer and the fees they levy on these services can vary, it’s good to understand the main categories of brokers. In addition to selling shares of companies, a stockbroker may also sell other traded securities such as mutual funds and exchange-traded funds. Some offer additional services and advice.
Full-Service vs. Discount Stockbrokers
The main two categories of stockbrokers are full-service brokers and discount brokers. Just as they sound, a full-service broker-dealer firm provides more hands-on service, helping clients balance their portfolios and providing other investment advice. Discount stockbrokers provide few add-ons but still allow an investor to buy and sell stocks. Commission rates vary accordingly.
Because full-service stockbrokers provide an array of services over the course of the year, they typically base their commissions on a more all-inclusive model determined by the value of the investments they are managing. While there may also be additional fees, the typical commission structure for a full-service broker is known as the percentage of assets under management. The fee is charged annually and is listed within fee schedules as “x%/AUM” (assets under management).
In 2020, such commissions ranged from 0.59% to 1.18% on average, with high total asset values usually qualifying for lower commission rates. While these percentages may sound nominal, they can add up, especially as the value of one’s investments grow. To illustrate, total investments worth $50,000 would be charged the highest commission tier of 1.18%, for a cost of $590. If the investments grew to $150,000, the commission would decrease to an average of 1.09%, but annual fees would rise to $1,635.
Discount brokers, synonymous with online brokerage accounts, on the other hand, typically charge a per-transaction flat stock trade fee, regardless of the type of stock or number of shares being bought or sold. For example, if the stock trade fee is $5 per trade, that’s what an individual would pay whether they were buying five shares of a stock valued at $50 a share ($250) or 500 shares ($25,000).
Discount brokers usually do not provide any advice or analysis; they just make trades on behalf of their clients.
Is It Worth Using a Stockbroker?
Given how complicated the stock market can seem, the idea of having a licensed professional guide novice investors through every investment decision and trade might seem like a good way to get more comfortable with the principles of stock market investing. But as the above examples illustrate, the average full-service stockbroker commission can make the full-service approach an expensive one.
At the same time, the sheer number of decisions to make may make the idea of flying solo with a discount brokerage feel intimidating. Is it better to handpick specific individual stocks or go with a fund consisting of a variety of stocks? How diverse should a stock portfolio be? When is the best time to buy or sell? How can you tell if a stock is likely to rise? These are questions that can keep even seasoned investors up at night, not to mention people just getting comfortable with the ins and outs of the stock market.
There are other considerations. With discount stockbrokers, investors typically manage their portfolios online, with an ability to buy and sell stocks at any time during stock market hours. This can enable investors to respond more quickly once the decision is made to buy or sell a stock — the trade can be executed with just a few mouse clicks. With a full-service stockbroker, the ability to make a trade may not be instantaneous (though there are some cases when this may be a benefit, allowing time for cooler heads to prevail before making a major investment decision).
But the lack of hands-on advice does not mean that investors who use discount brokerages are flying blind. Many online brokerages provide investors with robust tools and resources to help them get up to speed on the stock market and learn how to optimize their portfolios.
DIY investing also does not preclude getting professional advice, whether access to advisors is offered as a complimentary service with an investment account or investors choose to pay an advisor on an a la carte basis when the need arises. As some stockbrokers also charge a commission on individual trades, seeking third-party advice can help investors feel more confident the guidance they’re getting is unbiased.
Free Trades and Chat With a Planner
With long-term returns that have historically outpaced interest rates on savings, investing in the stock market can be a powerful strategy for financial growth. Even beginners may find investing less intimidating than they thought — and possibly see clear of high stockbroker fees.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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