Truth be told, one can start investing even without a brokerage account. When you are a young investor, choosing a perfect broker for yourself can often be much different than it would be for experienced investors of the same level of experience. You choose a broker in a similar way as you choose a stock – with a lot of careful consideration, as not all investors require the same brokers.

What Is a Broker?

Before choosing one for yourself, you should know what a broker actually is. Basically, we have two kinds of brokers: ones who are engaged directly with clients (regular brokers), and ones who function as mediators between a larger broker and a client (broker-resellers).

Regular brokers are usually believed to be more respectable than broker-resellers. That doesn’t mean that resellers are bad, but you should learn a bit more about their ways before you sign up with them. Regular brokers such as TD Ameritrade, Ally Invest, Fidelity, and Capital One Investing belong to recognized organizations. For example, they are members of the FINRA (Financial Industry Regulatory Authority) and the Securities Investor Protection Corporation.

Full-Service Vs. Discount Brokers

Let’s break it down even further and learn the distinction between discount brokers and full-service brokers. You might have guessed from the name – full-service brokers provide significantly more services than discount brokers. But, the services aren’t exactly cheap. When you hire a full-service broker, he will do much of the legwork for you, giving you plenty of one-on-one advice and customized suggestions and research.

When it comes to discount brokers, many of them will provide the option to request a broker solely for advice on a specific trade with your current brokerage account. Be cautious, though, because once you execute that trade, you will end up paying considerably more (in execution fees) after having consulted with an actual broker than you would with a plain online trade.

If you are a young investor, it is probably your best bet to go with discount brokers. Although some people advise new investors to hire full-service brokers, that’s not financially feasible for a young person who has just started investing. Moreover, many investors have used online discount brokers in recent years. They provide various tools suitable for inexperienced investors who aren’t always sure what their next step should be. Also, when you start slowly, you’ll be able to learn much more about investing if you do some of the work on your own.

Fees and Costs

Although trade executions fees are important, there are other types of brokerage fees one should take into account as well. Most people under 30 are limited by their budget. Before investing, it is essential that you look at the fees that could apply to you. By doing that, you will make sure that you get the most of the money you invest. Here are some examples of additional costs you should consider.

Minimums

To start a brokerage account, most brokers require minimum balances. With an online discount broker, the number usually ranges between $500 and $1,000.

Margin

New investors often don’t want to open a margin account straight away, but it’s something to consider in the future. The minimum balance is normally higher for margin accounts. Also, be sure to take a look at the interest your broker will charge you when you make a trade on margin.

Withdrawal

Even though the money belongs to you, it isn’t always easy to get it out of your account. Some brokers will charge you to make a withdrawal. Furthermore, they might not let you take any money if it will drop your balance below the minimum. With some accounts, you can write checks from them, but those normally require a much higher minimum balance. You should have a good understanding of the rules regarding the withdrawal of your money from your account.

Complicated Fee Structures

Even though the majority of brokers have comparable fee schedules, some have complicated fee structures. These structures can make it hard to spot hidden fees. Complex fee structures are typical among broker-resellers who might use them as a selling point to attract clients.

If your potential broker has an unorthodox fee structure, it’s even more important to confirm that he is legitimate. He has to look out for your interests, and his fee structure has to complement your investing style. When the rates seem too good to be true, they might be. Be sure to read about fee summaries and your account agreement thoroughly. Additional fees can be hidden there.

What Kind of Investor Are You?

The answer to this question should affect the selection of your broker. There isn’t one perfect broker for everyone. So, it might be smart to determine your investment style before you start to invest.

The Trader

If you don’t hold onto stocks for long periods of time, you are a trader. Traders are typically interested in dirty and quick gains that are based on short-term price volatility. Also, they make a lot of trade executions in a short amount of time. If this is how you envision yourself, search for a broker with low execution fees. Otherwise, your returns could be eaten up by high trading fees. You should know that active trading requires experience. Frequent trading and a new investor are often a match that results in negative returns.

The Buy-and-Hold Investor

A buy-and-hold investor, also known as a passive investor, holds onto stocks for the long term. They let the value of their position increase in worth over longer periods of time and then reap the benefits sometime later. Buy-and-hold investors’ main concern is staying away from brokers with monthly fees. A somewhat higher trade commission shouldn’t concern them.

Other Factors to Consider

If you find that your investment style falls between a buy-and-hold investor and an active trader, you are not the only one. In this case, additional factors will be crucial when picking the best broker for yourself. For example, an extremely young investor (a minor) won’t be able to open his own brokerage account. But, some brokers have made it possible to set up custodial accounts and thus offer fee structures that suit teenagers. This way, people can start investing at a young age.

The Bottom Line

There will come a time when you’ll have to make a decision and choose a broker. It is essential to balance your needs as a client and as an investor. Another thing that is crucial is good customer service.

Your first broker doesn’t have to be your broker forever. However, you will have a much better shot at making money as an investor if you take your time and do your research before choosing the right one.