Some like to sit back and let others manage their money – and some like to take control of their own investments. If the latter sounds up your alley, then prick up your ears...
No, it’s not an institution for those whose finances are wrecked beyond repair. A brokerage is simply a company that facilitates the buying and selling of financial instruments. And no, that isn’t a section of the orchestra.
A retail brokerage offers this service to individuals (as opposed to investment companies). You’ll need to set up a brokerage account to start buying and selling shares, bonds, commodities and other investments.
While there are other ways to invest, brokerage accounts give you the control to choose exactly which investments you want, rather than investing across a diversified portfolio selected by someone else (i.e. “active” as opposed to “passive” investing).
Why Should I Care?
If you want to do your own research and take a view on the markets – and invest accordingly – you probably want a brokerage account. Maybe you read about a company you think is promising, and want to buy its shares or bonds specifically. Or maybe you think gold or oil is underpriced, and want to invest in that.
While this gives you more flexibility and customization in your portfolio, it means your investment portfolio will be less diversified, and there’s a risk that any individual investment taking a knock could harm your portfolio significantly. On the other hand, if you’re confident you can pick a winner , you could see significant gains.
Note that many brokerages will also offer the chance to invest in more diversified pools of investments, e.g. you could spread your investments across the UK’s biggest public companies by buying the FTSE 100. But the key is that you are still in the driver’s seat . Brokerage accounts best suit people who are excited by the idea of making investment decisions themselves.
Another point to note is the difference between cash accounts (where you deposit some money and invest it) and margin accounts (where the brokerage will lend you money, so you’re effectively investing more than you put in). The latter are more risky, as you can end up losing more than you put in – but that also means gains could be bigger if markets move in the direction you bet on.
What Can I Do?
Compare the different types of fees depending on how you expect to be investing:
- Annual fee – if you’re investing a small amount, a big fee may not make sense
- Fee per trade – if you expect to make lots of trades per year, this may be more important
- Frequent trader fee per trade – expecting to be trading often? The fee per trade typically goes down if you trade more than a certain number of times
- Exit fee – the fee to take your money out
- Whether the brokerages offer tax efficient options like ISAs and SIPPs
- Entry fee – to get started
- Inactivity fee – a fee if you don’t trade!
- Minimum investment
It’s typically a good idea to diversify your money across different investments.
It can take some of the pressure off if you have a separate pot of money in hands-off passive investing options (like a robo-advisor or mutual fund) as well as a brokerage account where you are selecting the investments – just in case things go wrong.