Investment professionals earn money by charging fees to clients for advice and by making commissions on the transactions they arrange. You might feel you have the right knowledge to make investment decisions on your own, without the advice of a professional. If so, there are ways you can pick your own stocks and bonds. But you will still need a broker to execute the trades.
If you want to pick your own stocks and bonds to invest in, you can make the selections yourself, without the advice of a professional. However, you must be licensed to actually make the trade. If you aren't licensed, you will have to make the trade through an investment company or brokerage, both of which employ licensed traders. These firms must go through a rigorous vetting process, and the dealers and sales agents must attend training classes and pass licensing examinations. Brokers who process stock transactions are either paid a flat fee or a commission. You cannot cut these people out of the equation unless you become a licensed broker yourself.
The individuals who market securities at brokerage firms are actually sales agents rather than brokers. The firm itself must register with state and federal governments as a broker. In case of self-employed people, the broker and the agent are one and the same. While you cannot cut stock market brokers out of your investment planning, you can eliminate the agents. When you open an account at a full service brokerage firm, you often pay an annual fee as well as a hefty per transaction fee. Agents cannot tell you what to buy, but they can make recommendations based upon your needs and long-term plans. If you have a huge portfolio and lead a busy life, then you might see the value in paying these fees. However, for many people it makes more sense to open an account at a discount broker.
Discount brokers must register with the Securities and Exchange Commission and state regulatory authorities, but many of these firms offer easily accessible online accounts. You never meet an actual sales agent and you never receive any sales advice. This means you can eliminate most of the fees associated with full service brokerage firms. You can fund your account with a mailed in check, direct deposit or automatic transfer. Online accounts include listings of the currently available stocks and bonds. including up-to-the-minute pricing. Simply choose the securities that you want to buy and the information gets passed onto a broker on the market floor. The broker holds the bond or stock certificate on your behalf, but you can see the current value of your holdings through your online account.
Discount brokers are less expensive than full service firms but you still pay fees when you buy and sell securities. These fees cover the firm's administrative costs and the wages of the brokers who actually conduct your transactions. However, you normally pay small flat rate fees rather than sales-based commissions, which are common at full service firms. Aside from per transaction fees, you sometimes have to pay fees for receiving paper statements, and some accounts have annual or monthly maintenance charges. You save money and have a greater degree of control, even though a broker works behind the scenes on your securities transactions.
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