Thinking of opening a brokerage account? These accounts are probably a lot more versatile than you realized. Whether you opt for the personal service and advice of a traditional broker or the savings and independence of a discount firm, you have a myriad of products from which to choose. Here are some of the types of securities you can trade through your brokerage firm and a few considerations to keep in mind.
Since only licensed stockbrokers can legally trade stocks, one of the major reasons to open a brokerage account is the opportunity to invest in this area. Brokers can buy and sell stocks on a number of exchanges, most notably the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
Common stock (the type sold on most exchanges) represents pure shares of a business. These investments may offer high growth potential, but they also come with risk.
While bonds are available through brokers, a broker isn’t legally required for their purchase. Purchase of a bond actually represents a loan to the issuer, whether it’s a government, corporation or municipality. The bond, then, is an IOU, a promise to pay back the principal and the agreed interest within a specified time period. Bonds don’t offer the same growth potential as stocks, but are considered a safer investment as their interest provides predictable income.
Brokerage firms also deal in mutual funds, although, as with bonds, the services of a broker aren’t legally required for their purchase. Mutual funds offer shares from a combined portfolio of investments in a variety of areas which can include securities such as stocks, bonds and short-term debt.
Four major categories of mutual funds are offered: money market funds, equity funds, fixed income funds and target date funds. Some mutual funds may offer dividends and capital gains distributions, but all carry a degree of risk.
Certificates of deposit can also be purchased through a broker, although they may be purchased independently through other avenues such as banks or credit unions as well. This special type of deposit account offers a higher rate of interest than other savings accounts in return for investing a set amount of money for a fixed time period. Generally, the longer the maturity time, the higher the interest paid. Be aware, though, that if you need to withdraw funds early, heavy penalties could result.
Exchange traded funds (ETFs)
Another type of fund you can buy through your brokerage firm is an ETF. These funds generally track an index such as the Dow Jones Industrial Average or S&P 500 though a portfolio of investments, aiming to duplicate market performance rather than to beat it. ETF shares trade exactly like stock and often need less management than mutual funds, so fees are generally lower.
Considerations and limitations
Before selecting your broker, be aware that not all brokerage houses are equal. Some have higher minimum account balances, and fees can vary greatly, particularly when comparing full-service brokers to their discount counterparts. Additionally, not all firms may trade all types of securities or have access to exactly the same investments. Taking the time to research the advantages and drawbacks of each firm will help you choose the one best suited to your budget and comfort level when making financial decisions.