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What Does an Investment Broker Do?

October 02, 2020 · 7 minute read

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What Does an Investment Broker Do?

If you’re considering dipping your toes into investing, chances are you’ve already discovered how much there is to learn.

First, there’s the alphabet soup of account types to contend with—401(k), 403(b), individual retirement accounts, and the list goes on. Not to mention the basics like understanding what a stock is in the first place.

But as frustrating as the investment lingo learning curve can seem, it doesn’t have to keep you out of the market. Remember: Even the savviest investors were beginners at some point!

One of the most common ways investors interact with assets is by trading stocks and bonds through a broker.
But what is a broker, exactly, and why might you consider one? What should you look for—and more importantly, avoid—when you’re shopping around to figure out which one’s best for you?

Strap in, because we’re about to dive into everything you need to know about brokerage firms and how they might help you meet your investment goals.

What Exactly Is a Broker, Anyway?

The basic broker definition, as per good ol’ Merriam-Webster, runs thusly:

Noun: One who acts as an intermediary, such as … an agent who negotiates contracts of purchase and sale.
In other words, a broker is anyone who connects you with a product or service you’re seeking, whether that’s a bet on a horse race or an arranged marriage.

For the purposes of this post, we’re specifically talking about investment brokers: the companies that enable you to buy and sell securities, like stocks, on an exchange market. SoFi offers an active investing account that allows you to make fee-free trades with no account minimums.

What Does a Broker Do—and Should You Use One?

If you’ve been following along closely, it may have occurred to you that a broker is, essentially, a middleman. And we wouldn’t blame you for wondering why you need one!

But reputable brokers (often in the form of a computer program) act as a boon to both buyers and sellers: They ensure that each party actually has money to buy assets with or assets to sell in the first place.

Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required.

And in many cases, going through a brokerage firm is the easiest and most accessible way for laypeople to get started with investing.

Pros and Cons of Using a Brokerage Firm

As with any financial service—or any service, period—there are both benefits and drawbacks to using a brokerage firm to facilitate your trades. Here’s the skinny.

Pros of Using a Broker

•   Accessibility. Thanks to the magic of the internet, you can sign up for a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a broker is one of the easiest ways to get started on your investment journey as soon as possible.
•   Simplicity. When you buy and sell through a broker, a lot of the tedious footwork—like keeping tabs of your interest earnings for tax purposes—is taken care of for you. Depending on the level of brokerage firm you go with (which we’ll come back to in just a moment), you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.

Cons of Using a Broker

•   Fees and commissions. Although they’ll vary based on the specifics you choose and the type of account you open, many brokers do levy maintenance fees as well as trade fees, or commissions, which can nickel-and-dime away at your nest egg. That said, there are ways to minimize your investment fees or even eliminate them entirely. Some brokers offer a certain number of commission-free assets, and SoFi’s active and automated investment services both come without transaction or maintenance charges.
•   Required portfolio minimums. Although it’s not true of every brokerage firm, many companies require you to keep a certain minimum amount of money in your account in order to use their services—and these minimums might be $500 or more, which can be a barrier to entry for some beginner investors. With SoFi, you can invest as little as $1.

Different Kinds of Brokerage Accounts

So, we’ve covered what a broker is, what they do, and why you might want to use one—as well as the drawbacks to keep an eye out for.

But hang on tight, because there’s still more to learn! (Like we said, investing can be a little complicated!)

Not all brokers are created equal. There are many kinds of brokerage accounts to choose from. The best product for you will depend on your individual financial goals as well as your budget. Here’s what you need to know to make the call.

•   Full-service brokerage accounts are just that: full service. Along with the ability to buy and sell assets, they might also include advice from real live financial planners and portfolio management to help you make the best investment decisions possible. However, these perks don’t come cheap! Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $500,000. Oh, and that’s before counting the fees they’ll collect as trade commissions or annual management fees.
•   Discount brokerages offer less in the way of consultation and guidance, but allow you to DIY your investment portfolio on the cheap. Many of them have $0 account minimums and may charge less than $10 per trade—or even offer totally commission-free assets.

To make matters a bit more complicated, both types of brokers usually offer both cash and margin accounts. In a cash account, you’ll need to have the actual cash money to buy your assets, whereas in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.

Different Types of Investment Accounts

Along with deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.

Maybe you’re investing for a shorter-term objective, like purchasing a house—or maybe you’re trying to ensure you’ll have a comfortable retirement. Either way, there are specific investment account types, or “vehicles,” designed to help you get there.

•   You can think of a personal investment account as a default investment vehicle. It’s a good choice if you’re looking to grow wealth and want to be able to add or withdraw your funds on your own terms without waiting to reach a certain age or life circumstance. You do pay taxes on earnings, however, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.
•   A 401(k) or 403(b) is an employer-sponsored retirement account, to which both you and your employer can make contributions to help you build up a nest egg for later on in life. However, because they require employer sponsorship, you usually can’t go to a broker and open one yourself—unless you’re self-employed or a small business owner and looking to open a Solo 401(k). These accounts offer tax benefits compared to personal brokerage accounts.
•   An IRA, or individual retirement arrangement, an investment account designed specifically for retirement goals, which you can open whether or not you’re employed by a separate party. IRAs carry certain tax incentives; for example, contributions to traditional IRAs are deductible, while Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59.5 or meet certain circumstantial requirements, such as purchasing your first home.

Your broker may offer other savings or investment vehicles, such as a 529 account, which is a tax-incentivized plan to help people save for educational costs. For full details on the type of accounts available, check with your broker directly.

Alternatives to Investing Through a Traditional Broker

Although using a broker to invest in the stock market might be a smart money move for many, there are plenty of other ways to get started with investing. (And as you’ve probably heard before, when it comes to investing, time is of the essence—compound interest works best if you start as soon as you can!)

If you’re looking for other ways to put your money to work for you, you might consider the following options.

Automated Investing

If you don’t want to pay the high prices for a full-service broker, but the idea of DIYing your portfolio makes you more than a little nervous, luckily, there’s a third option that could be just right for you.

Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.

Your funds will be invested in a diversified portfolio, and the platform often offers goal planning tools and rebalancing services to help keep your funds moving in the right direction.

Depending on the service you use, you might be able to start with a contribution as low as a single dollar — that’s the entry point for SoFi’s automated investment account.

Buying Stocks Directly From the Source

Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.

The good news is, that may save you money when it comes to trade commissions, but you may also be subject to proprietary fees from the company itself, or minimum purchase amounts.

Furthermore, diversifying your stock portfolio is a smart way to mitigate your risk factor. If all of your investments are tied up in a single company, you’re not in a great position if that company should begin to falter— whereas if you’ve invested in several different firms and other asset classes, you have a wider margin for error.

Choosing a Different Investment Strategy Entirely

Although the stock market is one of the most popular—and, when done right —low-effort ways to invest, there are plenty of other ways to turn your money into more money.

For example, you could invest in real estate and sell property at a profit, or turn a condo into a passive income source by putting it up for lease. If you’re savvy enough, you could also invest in art; the value of paintings is disconnected from the behavior of the stock market, so it might rise even during a crash.

That said, both of these tactics require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets—opening a brokerage account is a whole lot easier than flipping a house. And keep in mind that every investment involves risk. There’s no such thing as a sure thing!

Ready to Get Started on Your Own Investment Journey?

Although all investment strategies are risky, investing is also one of the best ways to work toward meeting long-term financial goals—whether that means funding a big purchase or kicking back and enjoying a relaxing, well-deserved retirement.

And if you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market.

Want to learn more about online investing and discover how SoFi Invest® might help you meet your goals? Check out our active and automated investment options.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.


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