What is a stock broker?
A stock broker is a trading platform (or person) that facilitates the buying and selling of marketable securities like stocks and exchange-traded funds (ETFs). Through a stock broker, you can open a brokerage account, a specialized financial account designed to hold investments and cash.
The term is often used interchangeably with “brokerage,” which is technically the name for a business that employs brokers or acts as a broker to facilitate trading.
When you want to buy stock in a company, you can’t simply call up the company and buy shares, and you can’t just walk into your local bank and invest. You need a specialized brokerage account, and that’s where stock brokers come in.
What are the different types of brokerage accounts?
There are two main types of stock brokers: discount and full-service. They each come with distinct costs and levels of service.
Discount broker
A discount broker is a company that lets an investor buy and sell securities online. As a customer, you can direct the process of buying and selling stocks or sign up for an account with a robo-advisor that’ll automate your investments. Many discount brokers have features that help you decide how to direct your trades, as well as educational tools to help you learn how to invest, but typically there’s no human broker taking and filling your orders.
True to their name, discount brokers are much cheaper than full-service brokers, and most offer zero-commission stock trading. For the vast majority of investors — especially the beginning investor — a discount broker is the best choice. That’s why our picks for the best trading platform for beginners are exclusively discount brokers.
Full-service broker
Think of a full-service broker as an old-school broker. It’s a firm that usually operates out of a physical office where an actual person, also called a stock broker, takes and executes clients’ buy and sell orders. A full-service broker might also provide personalized investment planning services, such as stock-buying advice, tax guidance, and retirement planning help.
Full-service brokers are far more expensive than discount brokers, given the costs of human advisors and brick-and-mortar locations. But costs have generally come down over the past few decades as they face competition from stock brokers, aim to make investing more accessible, and gain access to tools to automate work on their end.
Full-service brokers are best suited to high-net-worth investors who want a personal level of service and dedicated investment portfolio management. Discount brokers are most appropriate for nearly all investors.
What is the best place to buy stocks for beginners?
The best place to buy stocks for beginners will vary depending on your needs. There are three standard options investors have when they want to know where to buy stocks:
- Web-based stock brokers
- Investing apps
- Robo-advisors
The great thing for first-time investors is that many of the best brokers for beginners offer all three avenues to buy stocks under one roof.
1. Web-based stock brokers
The most common place to buy stocks is with a web-based stock broker. These accounts tend to be the best investment accounts for beginners seeking a simple investing platform and $0 online commissions for stocks and ETFs.
Before you start investing, be sure to check out our beginner guide on how to buy stocks.
2. Investing apps
The market is flush with options to buy stocks through mobile apps that also support other financial needs, like budgeting, banking, and cash transfers. The investing and banking app Acorns, as well as Cash App, are great free stock trading apps to buy stocks with micro investments and manage an array of money needs in one place.
3. Robo-advisors
For new investors, some of the best online brokerages for beginners also offer a robo-advisor service — some exclusively operate this way.
Instead of working with a human broker or self-directing your stock trading account, you use a robo-advisor to set your portfolio on cruise control. You input your financial goals, and algorithms work like dedicated brokers to do the buying and selling for you. Robo-advisors are a low-cost solution for new and hands-off investors.
RELATED: Compare our picks for the best robo-advisors for beginners.
What do you need to open a trading account?
The process for opening a brokerage account is similar to the process for opening a checking or savings account. If you’re using an online stock broker, it should take just a few minutes, and it’ll involve filling out a few simple forms.
If you’re opening a brokerage account:
To expedite the process, have this information available:
- Social Security number (SSN): Your broker needs your SSN for identity verification and to prepare year-end tax forms. If your account earns interest, receives dividend payments, or earns a profit (or loss) through sold investments, you’ll have to report those on your tax return.
- Driver’s license or other government-issued ID: If you don’t have a driver’s license, you can typically use another state-issued ID or a U.S. passport to verify your identity.
- Funding method: The easiest way to fund a new brokerage account for beginners is by an ACH transfer from your bank account. So have your bank routing and account numbers or online banking password handy. Alternatively, you can mail a check or wire money (usually for a fee), and your broker might have additional funding options.
If you’re opening an IRA account:
The process for opening a traditional IRA account or Roth IRA account is no different. In fact, all an IRA account is a standard brokerage account that’s taxed in a different manner. We mention this since one of the best steps new investors can take is to begin investing in a tax-advantaged account. Just like commissions, taxes can eat away at investment gains, and IRAs help shelter investors from paying these taxes.
TO LEARN MORE: Check out our picks for the best traditional IRA accounts. To save on taxes in the future, see our best Roth IRA accounts.
Understanding brokerage trading fees
Trading commissions and account minimums are largely a thing of the past — especially for most online stock brokers. Almost no stock broker or investing app charges commission fees on basic trading, and most let you open an account with $0 deposited, or just a few dollars.
However, most still require a minimum amount of money to use more complex features, such as margin investing. And $0 commission typically applies to stock and ETF trades; some brokers charge commissions for trading options and mutual funds, among other products. Take a look at a broker’s full fee schedule before you open an account to make sure it makes sense for how you intend to invest.
Additionally, note that ETFs, mutual funds, and other types of funds you invest in usually come with fees of their own, called an expense ratio. This is a cost outside of your broker’s control, but your broker will usually let you know the expense ratios for funds it lets you invest in.
Why commissions and fees matter
Here’s why trading commissions are so important: Say your broker charges a $6.99 commission for online stock trades and you have $1,000 to invest. You want to spread your money across a portfolio of five stocks.
To make your initial investments, you’ll pay nearly $35 in trading commissions. On a $1,000 investment, you’re effectively starting with a 3.5% loss in your portfolio.
Plus, you’ll pay another $6.99 each time you add to one of your stock positions. If you’re planning to build up your portfolio over time, it’s not hard to see how this can cost you thousands of dollars over the years. When you’re comparing the best investment accounts, keep fees in mind!
Keep in mind the account minimum
Most major stock brokers have no account minimum. This historically hasn’t been the case. When I opened my first brokerage account over 20 years ago, I needed to deposit $2,000 just to get started.
A low- or no-minimum-deposit requirement lets investors who don’t have a ton of spare capital get started investing early, so you can gradually build your first investment portfolio and take advantage of long-term gains.
How much money do you need to start investing?
There’s no set amount of money that you need to start investing. Some brokers will allow you to open a new account with $1, while others have minimum initial amounts, especially for mutual fund accounts. And even if your broker has a minimum, some will waive the minimum if you’re willing to set up a recurring transfer from your bank account into your investment account.
It’s also important to realize that some brokers allow you to buy fractional shares of stock, while others only allow purchases of whole shares. In other words, if you want to buy a stock that trades for $200 per share, you’ll need at least $200 to get started if your broker doesn’t allow fractional share investing. If it does allow fractional shares, you might be able to buy a “piece” of a share for just a dollar or two.
How to invest in stocks as a beginner
Follow these steps to get started investing in stocks:
- Determine your investing approach. You could be hands-on, selecting individual stocks, or hands-off, letting a robo-advisor manage your portfolio. You could fall somewhere in between, working with a broker to choose low-effort index funds for your portfolio.
- Choose how much to invest. Don’t invest money you’ll need within five years — your investments aren’t liquid funds, and short-term investments are too vulnerable to volatility. Before deciding how much to invest, make sure you’ve set aside an emergency fund, any vacation savings, short-term education costs, and other short-term savings like a down payment for a home or car.
- Open an investment account with a brokerage. Choose a brokerage like the ones on our list of best investment accounts to manage your investments. Open your account with at least the minimum investment.
- Diversify your stocks. If you’re investing in a self-directed account — where you pick individual stocks — choose stocks from businesses you understand across an array of industries. Avoid high-volatility stocks for now, or choose an ETF or index fund to skip having to choose altogether.
- Continue investing. Continue to contribute to your investment accounts and hold on to the investments long term in order to get the best and most stable returns on your investments.
Should beginner investors buy fractional shares?
Many of the best trading platforms for beginners now offer the ability to buy and sell fractional shares of many popular stocks. Investors essentially buy a slice of a share, which opens up access to a wide universe of investments for beginner investors that would otherwise be unavailable when starting with a small portfolio. For example, some popular stocks can cost more than $1,000 per share. Buying these stocks would be impossible for someone starting out with, say, a $500 investment.
But with fractional share investing, investors can buy slices of these stocks in smaller dollar amounts. Best yet, many of the best brokerage accounts for beginners have $0 commissions to invest in fractional shares and you can do so with as little as a few dollars.
LEARN MORE: Best brokers for fractional shares
Additional investing resources for beginners
If you’re new to investing, here’s a handful of helpful resources to help you get started: