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Do I Need a Brokerage? What They Are and How They Work

Before you dive in head first and start buying and selling stocks, it’s important to understand what a brokerage is and how one works.

For anyone who wants to trade – aka buy or sell – individual stocks, a brokerage is usually the best and only way to do it. They exist because as an average investor, you can’t just walk up to the New York Stock Exchange (NYSE) and ask to buy three shares of Apple, please. Brokerages are the interface between you and the stocks you want to buy.

What is a brokerage?

A brokerage is a firm (that usually employs brokers, which is the term for individuals) that will buy and sell stocks on equity markets like the New York Stock Exchange, on behalf of its clients. Those clients – that’s you! – tell the brokerage what they want to buy and sell, and a broker makes those trades for you, in exchange for a commission.

There are different structures and prices for those commissions, but for most brokerages that would be accessible to the average millennial, it’s a flat fee per trade that they make on your behalf. How much it costs per trade is where things really start to get interesting, because just like every other industry, technology has changed the brokerage game, hard.

How did technology change things?

In the olden days – ahem, like 20 years ago – brokerages were generally only accessible to wealthy investors, because they were staffed with real, human brokers who would execute your trades manually. Whether that meant phoning in your order, or going to the stock market floor, you had to pay them for their time, which was not cheap.


These days, the game has been radically changed by online brokerages, and the trading platforms they’ve built. Computers can now buy and sell stocks on your behalf, and since you don’t have to send the computer to the stock market floor to buy your Apple shares for you, it’s way cheaper.

While full-service brokerages with personalized service and real human interaction still exist, there’s been huge growth in the relatively new category of discount or online brokerages, which are much more accessible for the average investor.

How much does it cost to use a brokerage?

Well, it depends on whether you want the full-service model or the discount variety. Unless you really want to go meet with a suit about some money, and pay handsomely for the privilege, a discount broker is your best bet. It also happens to be the perfect option for a DIY investor – and in true fintech fashion, there are some really interesting discount brokers out there right now.

If you go with some of the newest discount brokers, like Robinhood, you might be able to trade stocks for free. Others, like Motif, aren’t free, but offer very competitive fees: As an investor using Motif, you pay either $4.95 for a stock trade, or $9.95 to buy into one of their set portfolios, which they call “Motifs.” (Cute.)

Then you’ve also got your more traditional discount brokerages, like Charles Schwab, TD Ameritrade and Vanguard. Don’t be fooled, though, because even these more standard options offer really competitive fee structures, with most trades only costing you between $5 and $15. They can offer these low prices because of their underlying technology platforms, that can execute trades on your behalf at a fraction of the cost of paying a human being to do it.


So, are there any other fees?

The nice thing about brokerages is that your trading commission is usually the only fee you pay. Unlike investing using a robo-advisor, or investing in mutual funds, there’s no management expenses involved, since you’re managing your own portfolio. That’s why it’s called DIY investing, and why just like a true DIY project, it’s cheaper than paying someone else to do it for you.

Am I ready to invest on my own?

Whoa now, I can’t answer that for you! But I can tell you that investing on your own, and buying your own stocks, isn’t for the faint of heart, or the inexperienced. You’ll need to know enough to know what to buy, when you want to sell, and how not to totally freak out if the markets go a bit sideways. $5 per trade might not seem like a lot, but if you panic and sell your stocks every day, it’ll add up quickly.

The one lower-risk way to use a brokerage that might be more intermediate-friendly is to use a brokerage to invest in your own portfolio of exchange-traded funds, or ETFs. You’ll need to read up on which ones to buy, and how to build your own portfolio, but these broadly diversified options are what most robo-advisors use to build you a portfolio in the first place. If you want to dip your toe into brokerages, but not risk it all on an individual stock or five? ETFs are your best bet.


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Header image: Shutterstock

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