More and more North Americans than ever before are now investing in the stock, equities and ETF markets thanks to an explosion of user friendly investing software, free investing apps and a well established marketplace for online brokers. In this post we will look at whether or not you need to use a broker to help manage your trades and investments and if so , what kind of broker is right for your needs.
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What Is a Broker And Do I Need One To Invest?
Simply put, a stock or investment broker is an intermediary or go-between who connects an investor with a securities exchange (i.e. the market where stocks and other financial assets are bought, sold and traded). Securities exchanges do not deal directly with the public and only accept orders from the relatively small number of individuals or companies who are recognised, certified members of that particular exchange.
Therefore, the vast majority of investors do need to instruct a broker to trade on their behalf. As such the short answer is that yes, you do need a broker.
Accordingly, the next question is what kind of broker do you need and who should you go about finding one?
Different Types of Brokers
There are several different types of brokers out there. Some brokers quite literally just act as go-betweens, taking orders from their clients verbatim, and then placing them on a clients behalf. Considering that brokers charge their clients fees and commissions for every transaction they place on a clients behalf, this kind of brokering is widely criticised as paying a needless middleman.
Let’s take a closer look at the different types of brokers available;
Full Service Brokers
Full service brokers are kind of like financial advisors specialising in the stock, bond ETF or equities market. As well as taking instructions from, and placing orders for, clients they also give advice and recommendations. Of course, these extra services do not at all come cheap and a full service broker.
It is often recommended that new investors should opt for a full service broker although in reality, the costs can be prohibitively high for new investors who are not looking to spend big money.
Discount brokers typically let clients fend for themselves and do not offer input or advice and simply act as go-betweens placing clients orders on the exchange for a reduced, or discounted fee.
Many popular online brokers and especially trading apps are basically discount brokers by another name. Whilst the reduced fees do allow new, small time investors to get started with trading, the lack of advice or guidance can often mean that investments are quickly lost owing to avoidable, common, rookie mistakes.
One increasingly popular alternative to full service or discount brokers is to use a robo broker or a bot. Robo brokers use complex algorithms to study markets, monitor trends and make predictions.
In some ways Robo Brokers are something of a halfway house between the 2 above options as they offer the low cost trading of discount brokers, along with also offering algorithmically calculated ‘advice’.
The downside to using robo brokers is that ultimately they can only as ever be effective as the humans programming their algorithms.
Which Broker Is Right For You?
In order to determine what kind of broker is best for your needs, you firstly need to identify your personal investment style. This initially means setting out what your goals are – are you looking for fast, lucrative returns and if so, are you ready for some serious risk? If so then you are basically a trader.
Or on the other hand are you looking for slow, sensible investments that will pay steady dividends over time; if this is you then you are a buy and hold investor.
Of course, there is a third way which is a combination of the two – having a personal broker offer you advice (whether human or AI) can help you to determine which assets to hold onto, and which to trade.
Vetting A Broker
Whichever kind of broker you elect to use, it is vital to properly vet them. You are trusting them with your money and as such, you need assurances that they will act on your instructions, and that any money you leave in their client account, is safe. In the case of a full service broker you also need to make sure that they are properly accredited to give advice.
For this reason it is often best to use an established or well known broker like Interactive Brokers. Whilst the fees may not always be the lowest, you do get some extra piece of mind.
Using A Broker For Your Business Investments
But what if you are looking to make investments on behalf of your business (or at least a business who’s money you manage)?
Well, all of the above is still broadly speaking correct, you will still need to use a broker to make trades and you still need to decide what kind of broker is best for the needs of your business.
Beyond this though, corporate investing (regardless of the company structure or ownership) is a different kind of beast altogether.
Firstly remember that if you make a loss, you risk damaging the company. A particular bad run may even see it unable to make payroll. As such, having a professional, full service broker on hand to help with investment advice can sometimes prove beneficial but the costs will certainly be higher. On the other hand, DIY investing via a Discount Broker with company money can prove a bit risky, but the costs are a lot lower.
Next, you may need to be extra mindful about the kind of investments you make in order to protect your own business’s reputation. For example, if your business prides (and markets) itself on sustainability, then investing in gas and oil could severely undermine this credos and turn-off customers. Whilst these are decisions that ultimately your business needs to make, having an experienced human, full service, broker to act as a second opinion could prove to be invaluable.
Furthermore a business (whether an LLC or a PLC) has slightly more complex tax requirements than most private citizens and once again, a full service broker may be able to signpost how your investments will affect the businesses tax liability – although of course there is no substitute for taking proper tax advice from a corporate accountant
Remember that any dividends from investments probably will be subject to taxation. Be sure to check with your corporate accountant to verify what the tax implications within your province are.
The other tax implication a business seriously needs to consider is whether joining a foreign exchange or investing in a foreign company might expose it to extra judicial tax liabilities. For example, the US in particular has some very unusual taxation laws and foreign based companies who invest in the Wall Street exchange may find themselves liable to pay tax in the US, as well as in their home country.
Ultimately, whilst a full service broker may prove helpful in helping your business to understand these complex issues, they are not tax attorneys and you will still need to take proper professional advice.
Investing can be exciting but it can also be scary. Fortunately though, help is out there to ensure you go into it with your eyes wide open knowing what to expect. Whichever kind of broker you choose to use, we wish you the best with your trading and investing.