June 16, 2010
Investing 101: Which Method Will You Use to Invest?
Before you get too far along in creating your investment plan, stop and take a moment to decide how you want to invest. Your answer will determine how you complete the next steps in your plan. The three basic methods people use to invest include: going it alone or DIY; working with a financial adviser or consultant; or a combination of these.
Let’s begin by exploring the options available to you as a “do-it-yourselfer.â€ Being a do-it-yourselfer does not necessarily mean that you will truly be alone. One of the first things you need to do to get started is to open a brokerage account. You can choose to open an account with a traditional (also known as “full service“) or discount brokerage. In each case, you authorize a broker to buy and sell stocks, bonds, mutual funds*, and other investments for you, and in turn you pay them a commission for this service. Commissions can range from as low as $4 to several thousand dollars based on your purchases and the type of broker you choose — discount or traditional.
If you decide to open an account with a traditional brokerage firm, you will work one-on-one with a personal stock broker. He or she will offer investment ideas and research, prepare reports about your portfolio, give you a run-down of how well your investments are doing, and generally be available with a single phone call or email. Discount brokers, on the other hand, don’t usually offer investment advice although some are now making research available. In general, they simply execute orders once you’ve decided to buy or sell an investment. And instead of personalized service, you will most likely make your trades online or with the first available broker. Some firms, such as Charles Schwab and Merrill Lynch, offer both services, allowing you to choose between traditional and discount formats. Some top discount brokers include E-Trade Financial, Ameritrade, TD Waterhouse, and Scottrade.
* In some cases you can purchase mutual funds directly from the mutual fund company without the aid of a broker such as Vanguard Funds. However, in other cases, you can only purchase them with the aid of a broker. If you are considering a specific mutual fund, it is a good idea to check with the company to see if you can purchase shares directly through them and possibly save on purchasing fees.