A brokerage account allows you to handle your own investments. Anyone with a computer and initial investment (deposit) can open a brokerage account. The trades are easy to make as well. However, the keys to successful trading are a bit more complex. Investing in stocks and bonds requires extensive knowledge of the investments and the concepts of trading. Brokerage accounts are self-directed, meaning that there are no managers out there to clean up the mess if your trades go awry. There are other pros and cons to brokerage accounts to consider.
Pro: Lower Costs
Brokerage accounts cut out the middle man, or the broker in the deal. This puts the commission in your pocket. Brokerage accounts are thus cheaper than using a broker.
Con: More Homework
Brokers are in the industry and know it well. Many have a feel for a good investment, while others have their fingers on the pulse of the market. You, as a private citizen, may still be in doubt of the purpose of a 10Q statement and what it has to do with you. The learning curve for investments is very steep and costly for new investors with brokerage accounts.
Brokerage accounts give you the opportunity to invest in companies that you personally favor. For example, a gaming enthusiast may want to own stock in their favorite gaming company, like the publically traded EA Games. In addition, brokerage accounts allow investments in familiar companies, while broker-managed accounts usually contain investments that you may not be familiar with.
Con: Constant Monitoring
Unless you are a buy-and-hold investor, a brokerage account requires daily attention. You must stay on top of the market and news on your particular investments at the very least to ensure that your investments are profitable. A broker-managed account is manned by a person who does this for you. In addition, you must be able to react to market news concerning your investments. During the market crash of 2008, brokers were able to make real-time decisions to minimize the damage to their investors. The average brokerage account holder has neither the knowledge nor the time flexibility to do this.
Pro: Instant Statements
Many brokerage accounts have the ability to download to your personal finance account. There, the information is integrated into your budgets and personal finance records.
Con: Statement Analysis
Brokers create quarterly reports of your investments that even include an analysis of how each individual investment is performing. Some even include advice on contributions in order to reach a specific retirement goal. You must analyze the information downloaded from your brokerage account.
- Securities Exchange Commission: Opening a Brokerage Account
- Financial Industry Regulatory Authority. "What to Expect When You Open a Brokerage Account." Accessed Oct. 8, 2020.
- Securities Investor Protection Corporation. "How SIPC Protects You." Accessed Oct. 8, 2020.
- Financial Industry Regulatory Authority. "Types of Investments." Accessed Oct. 8, 2020.
- Office of Investor Education and Advocacy. "Type of Brokerage Accounts." Accessed Oct. 8, 2020.
- Securities and Exchange Commission. "Investor Bulletin: Understanding Margin Accounts." Accessed Oct. 8, 2020.
Jonita Davis is freelance writer and marketing consultant. Her work has appeared in various print and online publications, including "The LaPorte County Herald Argus" and Work.com. Davis also authored the book, "Michigan City Marinas," which covers the history of the Michigan City Port Authority. Davis holds a bachelor's degree in English from Purdue University.