Making investments through a broker can be expensive. This is true whether your broker sits across from you at a desk, or if you trade stocks through online brokerage firms. In some cases, their services are worth it, but in others, it will be better for you to go it alone. We’ll deal with specific strategies, but first, let’s better understand what brokers offer in the first place.
Why Even Have a Broker?
People use brokers for different purposes. Some brokers (particularly those online) are essentially markets through which options are sold. It can be difficult or time-consuming to invest outside of these brokerage houses. Other brokers will make investments on your behalf, the thinking being that the broker brings a level of professionalism and knowledge to these investments that you (presumably) could not.
Brokers who provide active portfolio management are only as valuable as the returns they can achieve. Many brokers will charge 1% of your portfolio value each year. This may not sound like a lot of money, but you should think of that 1% as directly subtracting from your annual returns. If, in addition to this scalable fee, your broker charges you $10 or $20 per trade (though it can be even more), you will have to see very large returns in order to outperform unmanaged investment options available through a Betterment portfolio, for example. Because index funds with no active management often present 8-10% annual returns, a broker/manager would have to pull off returns of around 15% in order to be more valuable than a mindless index fund. Some brokers are that good; others aren’t.
A brokerage house, often offering discounted trading online, might not take an annual percentage of your portfolio. But because you’ll still be paying $10 or $20 per trade (or more), you’ll have to invest mindfully. After all, if your portfolio balance is $10,000, 10 trades at $20 apiece represent 2% of your potential returns. That’s expensive if your investments aren’t performing extremely well.
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How Can You Save on Brokerage?
So the question is, how does one save on brokerage services? There are several methods.
- Don’t Use a Broker. Though this will limit the stocks you can by and the convenience with which you can buy them, you can go it alone and still see great returns. Many companies have Direct Stock Purchase Plans, which can give you cheap access to stock from a single company. Downside? This takes a long time and could still give you fees unless you agree to buy a certain amount of stock from the company each month, in which case you’d probably have too much of one company’s stock! DRIP programs and Single Share buying strategies have merits but are not good options for most people.
- Have a Lot of Money/Trade Frequently. Though I am being sarcastic, this is the damn truth. If you have money and can invest frequently, there are many brokerage houses which will waive trading fees, or discount them steeply. Frequent trades are a recipe for disaster for all but true professionals, and these likely won’t need discount trading the way beginning traders will.
- Make Each Investment Count. For beginning investors without a lot of investment capital, it’s best to just be smart about your decisions. Make each investment decision like your career depends on it. After all…it might. You should definitely take advantage of cheap retirement investment strategies When it comes to investing in individual stocks for short-term dividends, learn everything you can about your investments, and invest smartly. This will take some time, but it will turn you into the kind of investor who can see returns that match or even exceed the performance of investment management brokers. One way to make that easier is by investing in Motley Fool stock picks.
There’s no easy way to create a valuable portfolio, but as you can see, the best start is to become an expert on your own. The more experience and knowledge you have, the more you’ll be able to do yourself, and the less you’ll have to pay in commissions and fees to brokers. The fees you do pay to brokers will be worth it, because smart investments will pay for them many times over.
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