Investing could help you grow your money, but because investors can’t walk into the New York Stock Exchange or Nasdaq to make trades, you likely need a brokerage firm if you want to invest. A brokerage firm makes a wide range of assets available to investors. These could include stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. And when you want to sell assets, a brokerage firm helps connect you to buyers. Here’s what else brokerage firms do and how they work, plus tips for choosing the brokerage firm that’s right for you:
What is a brokerage firm?
A brokerage firm—also known as a broker-dealer, securities firm, or stock brokerage—is a financial institution that allows investors to buy and sell investments. Beyond allowing you to place trades, brokerage firms do the following.
They ensure secure transactions and safeguard your assets
Brokerage firms use trading software and secure platforms to help protect your cash and assets. All investing comes with risk of losses from market moves, but these safeguards are intended to help minimize the risk of theft. Additionally, the Securities Investor Protection Corporation (SIPC) insures up to $500,000 in assets in most brokerage accounts, and up to $250,000 of that can cover cash. This doesn't protect you from the risk that an investment loses money but can help protect you in the rare event that your brokerage firm goes out of business.
They can provide investment research
Many brokerage firms can offer resources to help investors explore and compare different investments. They might also offer tools like stock screeners and mutual fund screeners, which could help streamline time-intensive research.
They offer different investment accounts
Brokerage firms provide various accounts for various goals. Typically, at a minimum, they offer a taxable brokerage account, which just about anyone could open and use to place trades. These generally offer many investment choices and no contribution limits or withdrawal penalties. There are no tax advantages on the contributions to or withdrawals from a brokerage account. You could do the buying and selling yourself or invest in a managed account, where a financial professional or robo advisor can make your trades for you.
Some brokerage firms offer tax-advantaged accounts for more specific purposes:
- Qualified education costs, such as college tuition and room and board, with a 529 plan
- Health care expenses with a health savings account (HSA), if you have an HSA-eligible high-deductible health plan
- Retirement with a traditional or Roth IRA
The IRS determines a maximum you can invest in tax-advantaged accounts each year, but you choose how much you want to contribute up to those limits.
They can help simplify account management
Brokerage firms typically have user-friendly websites or mobile apps that offer consolidated views to help you manage your accounts. These platforms can provide a snapshot of your financial picture and help you identify opportunities to buy, sell, and diversify your investments.
How does a brokerage firm work?
When you place an order through your brokerage firm—whether online, on an app, or with a full-service human broker—the brokerage firm does the work necessary to finalize your transaction. Brokerage firms may charge fees or earn a small commission for this service, though many now offer low-cost or commission-free trading options.
Types of brokerage firms
There are a few different categories of brokerage firms, and a single firm, especially a large one, may fit the criteria for more than one of these descriptors.
Online brokerage firms
Many full-service investment brokerage firms have online capabilities, but this refers to online-only brokerage firms, which often have no physical location and service investors solely through digital platforms. They're sometimes referred to as discount brokerage firms. They’re widely known for easy, on-the-go access, educational tools, and low or no commissions on trades. They may suit DIYers who prefer a hands-on approach to investing.
Full-service brokerage firms
If you prefer a more robust service offering, a full-service broker dealer may also provide resources like financial planning, access to planning tools, and personalized advice and security recommendations in addition to executing trades. Some offer personalized investment management through an affiliate investment advisor.
In any case, they typically command higher fees than online or discount brokerage firms and may also offer a wider variety of investment products and services, including tax, estate, and retirement planning.
How to pick a brokerage firm
There are several steps to consider taking before you choose a brokerage firm to house an investment account. These actions may help you make a decision that best aligns with your needs.
1. Consider fees
Fees can vary widely between brokerage firms and account types. Once you decide on the kind of brokerage firm that suits your needs, shop around and compare account maintenance fees, commission rates, and wire transfer fees. You can also expect to be charged an expense ratio, another kind of fee, if you’re investing in mutual funds or ETFs, since those are baskets of investments that an investment firm puts together and manages.
2. Research account minimums
A brokerage firm’s account minimums should be compatible with your budget and income. Some brokerage accounts have no minimums at all, while others may require upward of $2,500 for certain investments.
3. Check for ease of use
Explore the brokerage firm’s mobile app and digital account platform. Researching and placing a trade should not be overly complicated. If you struggle to understand how to do it, imagine what the learning curve might be if you decide to become a customer.
4. Explore additional benefits
If you want guidance or further education, some brokerage firms offer tools and resources that could help, like articles, podcasts, webinars, investment screeners, analyst reports, and investment market news feeds.
Related: Explore Fidelity’s Learning Center.
5. Factor in reputation
Consider whittling down your finalists to firms with a solid history and positive reviews that speak to the experience and level of customer service you want. You could also seek recommendations from family and friends you trust.